High temperatures from Texas to Tokyo during the summer are the latest reminder of growing problems for the energy system as extreme heat becomes a threat to fuel supplies.
In addition to causing spikes in electricity demand as people turn on air conditioners, the scorching temperatures have also led to a wave of disruptions at oil refineries. That has helped keep U.S. gasoline prices high and diesel price increases easily outpacing crude oil. This summer has been particularly tough: July was the world’s hottest month on record, after the hottest June.
The scorching heat led refineries to cut oil processing by at least 2% globally in those two months, Macquarie Group said. While that may not seem like much, the outages have hit a refining system that has been strained by years of underinvestment and markets for oil products already tight due to the war in Ukraine.
“The extreme weather events we’ve seen this year are a really big deal,” said Ben Luckock, co-head of oil trading at commodities giant Trafigura Group. “The heat has caused enormous problems for refineries in Europe and America, with more outages and problems that are harder to solve,” he said in an interview in Singapore this week.
European crude oil processing fell by 700,000 barrels per day in the summer from a year earlier, according to an estimate from industry consultant FGE. That’s about 6% of regional throughput, based on figures from BP Plc’s latest Statistical Review of World Energy.
More than half of the decline was due to the heat, said Steve Sawyer, director of refining and head of downstream for FGE.
Rising temperatures are not only limiting supply but also boosting demand for fuel oil, which is typically used to generate electricity in the Middle East and South Asia. They also increase transportation costs by drying up vital waterways such as the Rhine and the Panama Canal.
“Rising ambient temperatures are limiting the operational efficiency of refinery units” and there are also more outages due to aging plants, said Serena Huang, chief Asia analyst at Vortexa Ltd. market volatility.”
Extreme heat is still a much bigger problem for stretched power grids than for fuel refineries. But its impact on fuel markets has been magnified by dwindling supplies, with U.S. inventories of middle distillates, including diesel, near a five-year seasonal low.
That is increasingly supporting diesel costs, with profits from making the industrial and heating fuel from crude reaching near seasonal highs in Singapore. U.S. diesel futures have also entered the widest backwardation since March, a market structure in which fast contracts trade at premiums to longer-term contracts.
And it’s not just rising mercury that threatens refineries and fuel prices.
“Climate change is also causing more extreme winter weather in the Northern Hemisphere, as a warming Pacific Ocean could move north and push the polar vortex south, creating cold spikes in northern Asia, Europe and North America,” says Henning Gloystein , director of Energy Climate. and resources at Eurasia Group.
The freeze in the US at the end of December was an example of this. Refinery throughput fell by about 2 million barrels per day over the period, said Parsley Ong, head of Asia energy and chemicals research at JPMorgan Chase & Co.
The increase in weather-related refinery disruptions highlights the growing range of challenges as the world tries to wean itself from fossil fuels while dealing with their impact on the climate.
“The market is overly sensitive to unexpected supply disruptions,” said Frederic Lasserre, global head of research and analysis at Gunvor Group Ltd. “Everyone knows there is no plan B. We have no inventories and we have no overcapacity anywhere.”
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