Leadership2 publishersIndependently confirmed2 min readPublished
Shell expects a record $42 refining margin for a quarter in which crude got cheaper
Shell forecast a refining margin of $42 a barrel for July to September, almost double the $24 of the prior quarter and above 2022's high of about $28. The gain came from fuel prices outrunning crude, so diesel buyers now carry refinery risk on top of oil risk.
The Board Room · Leadership desk
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What happened
- The Guardian links the margin to refined fuel prices rising faster than crude as war-damaged refineries in the Middle East and Russia stay shut and supplies tighten.
- Brent averaged $85.60 a barrel in the third quarter, down from $97.05 in the second but still above the $68.14 of a year earlier.
- Diesel's premium over the global oil benchmark rose above $100 a barrel for the first time.
- Low Rhine water after summer heatwaves forced Shell to cut runs at its Rheinland refinery in Germany, taking utilisation to 93% to 97% from 102%.
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Why it matters
- cost Diesel buyers got none of the benefit of cheaper crude, because the refining margin rose $6.55 a barrel more than Brent's quarterly average fell.
- exposure Buyers supplied from inland German refineries carry river risk on top of the war-related shortage, since low water cut Shell's own runs in a quarter of record margins.
- decision Choosing fixed or floating diesel prices this quarter means choosing between locking in a spread set during a shortage and staying open to a margin already 50% above the 2022 peak.
In Shell's third quarter, refined fuel and crude moved in opposite directions. The margin rose $18 a barrel, or 75%, from the second quarter [16], while the average Brent price fell $11.45, about 12% [18]. City AM describes the indicative margin as the gap between the cost of crude and the market value of finished fuels such as diesel and gasoline [4]. On that definition, any rise in fuel prices over the quarter came from the refining spread, because the crude underneath got cheaper [4][18]. Once the diesel premium passed $100 a barrel, it was larger than the quarter's average price of the crude it is made from [19].
One reading is that diesel is simply following an oil price that is still near $100 [1]. The two reports describe crude differently. The Guardian says oil has retreated from a spring peak above $115 a barrel [1]. City AM says it has "stubbornly held above three-digits" [2]. Both are describing the price now. The $42 margin came in a quarter when Brent averaged well under $100 [6], so a buyer watching the crude headline would have seen that cost fall while diesel set records [15]. British diesel passed 200p a litre for the first time last week [8].
The gain lands with companies that own refineries and sell the product. City AM reported that Shell's refining surge will help offset a softer chemicals division and absorb about $2.5bn of expected cash outflows for German emissions certificates [13]. TotalEnergies has the continent's largest refining capacity [14]. Its chief executive, Patrick Pouyanne, told an industry conference in London this week: "We're doing really well by being integrated. Integration means your refineries in Europe, which you thought were liabilities, are suddenly becoming goldmines." [10]
The record covers one quarter. Shell's $42 is a forecast, published in a trading update on Wednesday [3]. Neither report says when the war-damaged refineries will restart. Against the shortage, G7 leaders agreed on Friday to release emergency stocks of diesel and oil, a supply City AM put at 100m, to head off a supply crisis [11]. They said they would work with the International Energy Agency to ramp up releases "in light of ongoing market pressures" [11]. I think the third-quarter figures justify carrying diesel as its own budget risk, priced off the refining spread, for as long as those refineries stay shut.
What to watch
- Shell's full third-quarter results at the end of October, which will show whether realised refining earnings match the $42 indicative margin.
- Whether the G7 emergency release of diesel and oil stocks brings the diesel premium back below $100 a barrel.
- Restart dates for the war-damaged refineries in the Middle East and Russia.