Page 7 - FSUOGM Week 21 2022

FSUOGM COMMENTARY FSUOGM

Refining capacity shortages are causing refining margins to reach record highs (Saudi Arabia Ministry of Energy)
However, the supply/demand balance on world as a result of the pandemic. This tightness in
crude markets is delicate enough, with commer- the jet fuel market may be great news for refin-
cial inventories being low enough, that even a ers, but it could result in a supply crisis if the
small disruption can make a very big contribu- post-pandemic recovery in demand continues
tion to price volatility. gaining pace.
It’s important to note, though, that this vola- If implemented, the EU’s embargo of Russian
tility isn’t confined to crude oil markets. Global oil and petroleum products will place unprece-
petroleum product markets are inevitably feel- dented pressure on the European fuel market.
ing the impact of recent events too. However, In the event of a blanket ban, the markets worst
middle distillates (diesel and jet fuel) have been affected will be those heavily dependent on Rus-
affected even more significantly than crude oil. sian crude such as Hungary, which would have
For example, data from oilprice.com show that to upgrade its refineries extensively and estab-
US heating oil futures climbed by about 55.3% lish new infrastructure to receive alternatives to
between the beginning of the year and May 18, Russian feedstock. But those same countries are
while WTI crude future went up by around likely to be permitted more time to phase out
45.1% over the same period. Russian imports.
And these numbers from the US market are
not outliers. All around the world, middle dis- Africa
tillate markets are in turmoil, with significant Meanwhile, African states, many of which rely
consequences for the regional economic and on imports to cover to their full demand for
political scenes. This article offers a brief look at refined products even in cases of upstream
some of these consequences. abundance, are also being affected.
The disconnect between hydrocarbon pro-
Europe duction and downstream capabilities is particu-
Prices for diesel and jet fuel have skyrocketed in larly pronounced south of the Sahara Desert.
Europe this year, owing to a seemingly perfect The two largest economies in sub-Saharan
storm of factors. Jet fuel was end-priced at 120% Africa, Nigeria and South Africa, are wrestling
higher in the week ending May 13 than a year with issues around supply and prices of jet fuel,
earlier, while diesel was trading at more than diesel and gasoline, with the refining slates of
double the price. both countries largely out of commission.
Western sanctions against Russia have led For South Africa, the shortage is most acute
to supply disruptions, as exporters have had for jet fuel. There doesn’t seem to be an easy solu-
difficulty completing transactions. Meanwhile, tion, and with two of the country’s six refineries
some buyers have been shunning Russian petro- (Engen and Sapref) having already shut down,
leum products to avoid reputational damage. As likely permanently, the outlook is bleak. In the
Europe takes far more Russian diesel, jet fuel and meantime, a decision on the fate of another
other refined products than any other market, it plant (Natref) is due to be taken this year, while
is here that the impact has been most acute. a fourth refinery (Astron) is recovering from
Higher crude prices, also partly tied to Rus- a fire and another (Mossel Bay GTL) is strug-
sian supply fears, have also fed into higher fuel gling to obtain adequate feedstock. Only Sasol’s
prices. Other factors include robust seasonal 160,000 bpd Secunda Coal-to-Liquids (CTL)
demand, low stocks and a lack of local supply. plant is fully functional and is even undertaking
While diesel prices have climbed higher, jet an improvement programme.
fuel is now the most lucrative petroleum prod- Without these refineries, South Africa has no
uct to produce in Europe, with the physical crack choice but to continue depending on imports to
spread soaring to a record $69.4 per barrel on cover the vast majority of its fuel demand. This
April 29. Cracks have seen more than a 10-fold is a logistically challenging practice, as most of
increase compared with averages in 2020 and these imports enter the country by sea, via the
2021, when demand for the product nose-dived port of Durban.

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