Extreme heat fast becoming a threat to global fuel security

Searing temperatures from Texas to Tokyo over the summer are the latest reminder of a growing headache for the energy system, as extreme heat becomes a threat to fuel supply.

In addition to causing spikes in electricity demand as people fire up air conditioners, the scorching temperatures have led to a spate of disruptions at oil refineries. That’s helped keep US gasoline prices elevated and saw diesel cost increases easily outpace those for crude. This summer was particularly grueling: July was the world’s hottest month on record, following the hottest June.

The searing heat led to refiners cut oil processing by at least 2% globally over those two months, according to Macquarie Group. While that might not seem that much, the outages have hit a refining system that’s been stretched by years of under-investment and oil product markets that were already tight due to the war in Ukraine.

“The extreme weather conditions we have seen this year really are a big deal,” said Ben Luckock, the co-head of oil trading at commodities behemoth Trafigura Group. “The heat has created huge problems for refineries in Europe and America with more outages and problems that are harder to fix,” he said in an interview in Singapore this week.

European crude processing dropped by 700,000 barrels a day over the summer from a year earlier, according to an estimate from industry consultant FGE. That’s around 6% of regional throughput, based on figures from BP Plc’s latest Statistical Review of World Energy.

More than half of the drop was due to the heat, said Steve Sawyer, FGE’s director of refining & head of downstream.

As well as constraining supply, the rising temperatures are boosting demand for fuel oil that is commonly used to generate electricity in the Middle East and South Asia. They’re also adding to transport costs by drying up vital waterways like the the Rhine river and the Panama Canal.

“Rising ambient temperatures are limiting operating efficiencies of refinery units” and there are also more outages due to aging plants, said Serena Huang, lead Asia analyst at Vortexa Ltd. “Disruptions to refinery supply or shipping operations is almost certain to amplify uncertainty and price volatility in the market.”

Extreme heat is still much more of a problem for stretched electricity grids than fuel refiners. But its impact on fuel markets has been magnified by dwindling stockpiles, with US inventories of middle distillates, including diesel, near a five-year seasonal low.

That’s supporting diesel costs ever more, with profits from making the industrial and heating fuel from crude near seasonal highs in Singapore. US diesel futures have also shifted into the widest backwardation since March, a market structure where prompt contracts trade at premiums to longer-dated ones.

And it’s not just the rising mercury threatening refinery operations and fuel prices.

“Climate change is also causing more extreme winter weather across the Northern Hemisphere as a warming Pacific can move northward and push south the polar vortex, causing cold spikes in North Asia, Europe, and North America,” said Henning Gloystein, director of energy climate and resources at Eurasia Group.

The freeze in the US in late December was an example of that. Refinery throughput dropped by about 2 million barrels a day over the period, said Parsley Ong, the head of Asia energy and chemicals research at JPMorgan Chase & Co.

The increase in weather-driven refinery disruptions highlights the growing array of challenges as the world attempts to wean itself off fossil fuels, while at the same time trying to cope with their impact on the climate.

“The market is overly sensitive to any unexpected supply disruption anywhere,” said Frederic Lasserre, global head of research & analysis at Gunvor Group Ltd. “Everyone knows there’s no plan B. We have no stocks, and we have no excess capacity anywhere.”