Rising global temperatures pose threat to Atlantic basin refinery operations

Higher global temperatures are posing a threat to refinery operations on both sides of the Atlantic, although softer fundamentals may mean that markets are better placed to ride out the summer storm. 

Forecasts have shown for some months that this year’s hurricane season in the US will bring a higher number of storms than is typical. The National Oceanic and Atmospheric Administration’s (NOAA) outlook in May for the 2024 Atlantic hurricane season predicted an 85pc chance of an above-normal season, with 17-25 named storms and 4-7 major hurricanes. The NOAA pointed to near-record ocean temperatures in the Atlantic as a key contributing factor. EIA data show that demand averaged 9.24mn b/d in June and the first week of July this year, compared with 9.57mn b/d and 9.48mn b/d over the same periods of 2017 and 2005, respectively.

Now that the hurricane season is under way, it appears that forecasters have their finger on the pulse. Hurricane Beryl made landfall on the US Gulf coast on 8 July and was classified as a category 5 storm, the strongest on a widely used scale of 1-5, meaning that catastrophic damage will occur with winds rising above 157mph. Beryl marked the first hurricane in the Atlantic this season, but some more significant firsts too. 

Beryl was the first category 4 hurricane ever to form in the month of June and on 2 July became the earliest category five hurricane on record in the Atlantic — beating 2005’s Hurricane Emily by around two weeks and reaching higher sustained wind speeds too, according to the US’ National Hurricane Center (NHC). The NHC says the hurricane season runs from 1 June to 30 November, but that the first major hurricanes do not typically form until late August or early September.

Beryl brought serious destruction to island nations in the Caribbean, and flooding and extensive power outages on the US Gulf coast. But oil platforms and refinery assets were left broadly unscathed, and crude and refined products markets showed little reaction. Nymex front-month Rbob gasoline futures fell to 253.79¢/USG at the close in Houston on 8 July from over 260¢/USG on 3 July, while front-month WTI crude values fell to $82.33/bl from $83.88/bl over the same timeframe.

In the coming months, the fallout could be more severe, particularly if the forecast of 4-7 major hurricanes comes to fruition. Hurricane Harvey in 2017 brought flooding that disrupted around 3.7mn b/d of refining capacity on the Texas coast, for example, knocking Gulf coast refinery utilisation rates down to 61pc from 96pc between the end of August and early September. And Hurricanes Rita and Katrina in 2005 shut in around 3mn b/d of refining capacity, causing gasoline margins to soar. 

Fundamentally, refined products and crude markets are broadly amply supplied and facing lacklustre demand, something that may limit the uplift of any hurricane-related shutdowns in the coming months. US gasoline demand this summer driving season has not hit the highs that are typical for the time of year, and has not pulled sizeable volumes of European-origin gasoline across the Atlantic. EIA data show that demand averaged 9.24mn b/d in June and the first week of July this year, compared with 9.57mn b/d in 2017 and 9.48mn b/d over the same periods of 2017 and 2005, respectively. Stocks, on the Gulf coast in particular, are also noticeably higher, providing a softer landing for any refinery outage fallout. The same EIA data show gasoline stocks in the Gulf coast region averaged 87.8mn bl over the same June/July period, 7pc above 2017’s 81.8mn bl and 34pc above 2005’s 65.5mn bl. And gasoline crack spreads on both sides of the Atlantic have been counter-seasonally under pressure this summer.

Hurricanes are much less likely to affect European refining operations, although operations have been affected at Belarus’ 240,000 b/d Mozyr refinery this month, but weather-related issues as global temperatures rise are becoming more prevalent. 

Heatwaves in Europe and particularly the Mediterranean caused refinery run rates to fall last year, and temperatures have been high again this year, with the EU’s Copernicus climate change service showing that June 2024 was the warmest June globally on record. Romania was expecting to face power cuts in July as temperatures approached 40°C. And cities in Spain, Italy and Greece were forecast to near the same levels in mid-July.

Refinery operations become problematic at more extreme temperatures because heating and cooling is inherently important to the crude distillation process. Heat exchangers and cooling systems can become overworked and cutting run rates is a potential solution. Access to diminished water sources used by refineries for cooling can also cause issues.
Already in the first quarter of this year, Italian refineries faced the prospect of curbs in water supply owing to droughts and some drew on underground water reserves, which are also a source of clean drinking water, a refinery manager in the country said. 

Polish refiner Orlen told Argus that the Gdansk and Plock sites were built to operate at temperatures spanning -25°C to +36°C, and said the cleanliness of air cooling systems is closely monitored to ensure maximum efficiency. The firm is also examining “heat-proof” systems that it says will be implemented in future installations such as “high-mounted water coolers, which are additionally equipped with booster pumps of cooling units that locally supercool individual systems”. High temperatures in the country of late have not affected refinery operations, Orlen said.

Spain’s Repsol said that while its refineries are designed according to the local climatology, and “to date none of our facilities have had to reduce activity due to high temperatures”. But refinery output across Spain was the most affected of all regions last year, with output in July-August falling by 5-10pc, according to sources.
Similarly to the US, the European market is better placed to deal with any weather-related outages this summer. 

Road fuel demand has been somewhat lacklustre and gasoline and diesel cracks have trended down in recent weeks — a particularly atypical trend for gasoline, as margins historically peak in the summer. Fresh data from French fuels federation Ufip show that national gasoline and diesel deliveries fell by more than 10pc on the year in June, for example.

Euroilstock data show that EU-15 + Norway oil product stocks tallied 586mn bl in June this year, up from 570mn bl last year and 555mn bl in June 2022, providing a cushion. 

The fact that Europe is structurally oversupplied on gasoline lessens the potential fallout of any refinery shutdowns on the continent. But the same cannot be said for middle distillates, such as diesel and jet fuel, for which Europe is reliant on imports. European import supply chains are longer following the exclusion of Russian material from the market last year, and are longer still this year as vessel attacks by Yemen-based Houthi militants in the Red Sea region mean that the vast majority of arrivals are taking the Cape of Good Hope route, which takes an extra 14 days or so.

Shorter term, that leaves Europe more exposed in the middle distillate market should refineries in the region face weather-related outages in the coming months. In the longer term, if global temperatures continue to set fresh records, the frequency of weather-related refinery disruption may hit record levels too.

Data: Argus and Euroilstock

Author: Elliot Radley, Editor, Oil Products,