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Diesel and gasoline: the impact on refining margins

Unquestionably the most visible part of the modern oil industry is the filling station.

Our abject reliance upon diesel and gasoline, its influencing of every aspect of our lives, from job choices, to food prices, to social activities, renders the filling station the unlikely backdrop to a shared global experience - the meeting point at which the entire chain, from oil field to end user, unites in a near daily ritual.

Everything changes in 2008. By February, 10 ppm diesel barges were $46.5/mt above 10 ppm gasoline barges, by March $204/mt above gasoline.

It's a connection that has been evident for decades, as meteorological disruption, military intervention and political instability in and around major oil producing regions have constantly found their echoes in fuel shortages and price rises at forecourts internationally.

It should come as no surprise then, that arguably one of the most fundamental changes to the accepted economics of oil production and refining has once again been reflected, noted, doted upon by tabloids and protested over by motorists, as a result of price changes at filling stations.

While it has been crude's recent, inexorable surge to $146/barrel that has been uppermost in the minds of most people, it is the widening spread between the two road fuels now evident in many countries that hints at the underlying changes to the fortunes of diesel and gasoline , and the impact the change has brought to refineries.

In Europe, the UK was a grudging pioneer of the move. Diesel values today, already the highest in Europe, remain further above gasoline at the country's filling stations than in almost every other European country, with the exception of Switzerland.

According to the motoring organization, the Automobile Association, the average UK pump price on August 12 was 114 p/liter ($8.27/gallon) for gasoline, and 126.3 p/liter ($9.16/gallon) for diesel.

Looking back to July 2007, it was only UK pumps that exhibited this trend, and then by only the slenderest of margins - nationally, diesel was more expensive than gasoline by an average of just half a penny.

By July 2008, however, the majority of Europe, 18 out of some 26 countries surveyed by the AA, now exhibit the same price pattern. It is only the 'old' European Union members that have bucked the trend; eight nations, mostly the founding member states of the EU like France, Germany and Belgium, who continue to promote diesel's spread through tax incentives.

The impact of that change for refiners has been profound, particularly since Europe, traditionally, has set out its stall to produce gasoline from light, sweet crudes to meet overwhelming US demand.

In simple price terms, the change is immediately evident--NWE 10 ppm barge values for the two road fuels spent much of the early part of 2007 level-pegging. Through the summer of that year, traditional US driving demand kicked in, pulling gasoline values away to peak at $798/mt, some $170/mt above 10 ppm diesel barges, on May 1, 2007.

Running into the final half of 2007, gasoline and diesel again broadly level peg, with diesel, supported by heating oil demand, moving above gasoline through the winter of 2007.

Everything changes in 2008. By February, 10 ppm diesel barges (see chart: Diesel 10 PPM FOB Rdam Brg, January 2 - August 14, 2008) were $46.5/mt above 10 ppm gasoline barges (see chart: Premium Unleaded FOB Rdam Brg, January 2 - August 14, 2008), by March $204/mt above gasoline, and by May, when the diesel barge flat price storms to an unprecedented $1,346.50/mt, the spread over gasoline (see chart: Gasoline Front Month Crack Spread, Jan - July 2007 / 2008)had grown to nearly $240/mt.

Next page: Seismic shift in demand patterns

Created: August 18, 2008

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