High fuel prices weighing on demand

According to the world's biggest independent oil trader, the global surge in the cost of fuel is starting to weigh on demand.

Mike Muller, head of Asia at Vitol Group, said Sunday on a podcast produced by Dubai-based Gulf Intelligence that consumers are being hit by the run-up in gasoline, diesel and other oil products.

There is very clear evidence that economic stress is being caused by the high prices, which some people refer to as demand destruction, said Muller, who is based in Singapore. It is not just oil, but it is also liquefied natural gas. In the US, prices for refined fuel have reached record highs this year and surged in most other countries, contributing to a rise in inflation. Years of underinvestment in refineries resulted in a global shortage of spare capacity.

The crack spread that refiners get from turning West Texas Intermediate crude into gasoline and diesel has reached $50 a barrel, more than three times the average for this century. On Friday, Exxon Mobil Corp. said its second quarter refining earnings rose to $5.5 billion.

The refining margins are at levels that nobody would have predicted, according to Muller, Vitol s Muller. The consensus is that they can't possibly go higher than that. He said that fuel prices could stay at today s levels if demand in China continues to recover as the government eases coronavirus restrictions. According to Russell Hardy, Vitol's Chief Executive Officer, told Bloomberg last month that China's oil consumption will increase by 1 million barrels per day by the end of 2022.

Muller doubts that China will increase fuel-export quotas in the near future, despite its independent refiners having the ability to raise production.

He said that more Chinese export quotas would be welcomed by the market and would do something to normalize those margins. The system is kept relatively tight month after month, and the disappointment sets in. It would appear that discipline is still in place.