Behind oil giants' record profit margins: refining bottlenecks replaced oil prices as a new engine for inflation, and US inflation faced a second rebound

The Zhitong Finance App learned that the average price of unleaded gasoline in the US has quietly risen above 4 US dollars/gallon. ExxonMobil (XOM.US) and Chevron (CVX.US) warned this week that global supply of diesel and other refined oil products may continue to be tight and keep prices high in the coming months.

Both companies reported sharp increases in refining profits in the second quarter on Friday. Currently, global refining capacity is in a state of extreme shortage due to the war between the Middle East and Russia disrupting supply and the continuous consumption of fuel stocks.

Nearly 10% of the world's crude oil refining capacity is actually paralyzed due to the closure of much of the Strait of Hormuz, ongoing Ukrainian attacks on Russian refineries, and China's export ban, according to Melius Research.

As a result, major refineries are operating at full capacity to meet demand, which means that even if crude oil is available for processing, they cannot produce more fuel. This situation has led to a record high in refining profits. While benefiting refinery owners, it has also boosted costs for consumers.

ExxonMobil's refinery on the US Gulf Coast achieved 95% capacity utilization in the second quarter, while Chevron's refinery in the US achieved 97% utilization in the quarter.

ExxonMobil CEO Darren Woods said in the company's earnings conference call, “I've never seen usable production capacity as low as today compared to demand.” “It will take a long time for the entire industry to get out of this predicament.”

ExxonMobil Chief Financial Officer Neil Hanson said that the biggest bottleneck in the oil market is not necessarily the blockage of oil transportation through the Strait of Hormuz, but rather the lack of global refining capacity.

“Currently available refining capacity is at the lowest level we have seen,” Hanson said, mainly due to market dynamics outside the Strait of Hormuz. “This has really led to record refining profit margins.”

ExxonMobil said its second-quarter diesel production was the highest in any single quarter since 2014, and its refining division received $5.5 billion in revenue, significantly higher than $1.4 billion in the same period last year.

Chevron CEO Mike Worth pointed out during the company's earnings call that as countries in the northern hemisphere replenish heating oil inventories before winter, the intermediate refined oil market, which includes diesel, aviation kerosene, and heating oil, may tighten further.

Worth said, “I think as we enter the third quarter or longer, we will see some upward pressure on the price of refined oil products.”

Rob Thurmel, senior portfolio manager at Tortoise Capital Advisors, said in the report that gasoline prices are beginning to be decoupled from crude oil prices and are instead traded based on inventory levels.

Refined oil inventories “are approaching historic lows,” Thurmel said. “Gasoline prices are less affected by changes in crude oil prices, which is more a reflection of changes in inventory levels.”

US inflation faces concerns about a “second rebound”

In macroeconomic discussions over the past few months, the market is accustomed to treating international crude oil prices as a “barometer” for judging US inflation trends. However, as global refining capacity becomes structurally tight, behind the record profits of refining giants such as ExxonMobil and Chevron, a more hidden and destructive mechanism is being formed — high refining margins are replacing crude oil prices themselves, becoming the leading force driving up US terminal inflation.

According to traditional logic, as long as the supply of crude oil is stable, terminal gas station prices will fall accordingly. However, the current fault in the market lies in “refining bottlenecks.” Nearly 10% of the world's refining capacity has been paralyzed due to geopolitical conflicts, blockage of waterways, Ukraine's attack on refineries, and export bans imposed by some countries.

Even if crude oil prices remain stable or even decline slightly, extremely high cracking price differentials still push the terminal retail prices of gasoline and diesel to a high level. This means that even if the government injects crude oil into the market by releasing strategic oil reserves (SPR), it will not be able to resolve the physical bottleneck of “not enough refineries to process it into fuel.” The disconnect between the supply of crude oil and the supply of refined oil products has caused terminal fuel prices to show strong downward stickiness.

As far as US inflation is concerned, gasoline prices directly affect consumer perceptions, but high profits and extremely low inventories of diesel and intermediate refined oil threaten the “secondary transmission” of the overall economy even more serious.

Diesel is the “lifeblood” of heavy trucks, rail transport, and agricultural machinery. As refineries push diesel profits to historic highs, shipping companies' fulfillment costs soared, and quickly transferred to retailers and agricultural product suppliers in the form of “fuel surcharges,” which in turn were transmitted to terminal food and consumer goods prices.

The shortage of aviation kerosene is driving up airline ticket prices, and heating oil continues to rise in the fall and winter waves of inventory replenishment. These factors have directly boosted inflation in the service sector. Even if the prices of some core commodities decline due to supply chain repairs, high energy logistics costs continue to squeeze room for reduction.

The Federal Reserve's decision-making dilemma

The “fuel premium” brought about by high refining margins has greatly made it difficult for the Federal Reserve to achieve the 2% inflation target.

High gasoline prices are the most easily perceived economic indicator for the public. High oil prices can easily raise residents' long-term inflation expectations, triggering a hidden risk of a spiral rise in wages and prices.

In the “last mile” of fighting inflation, the energy sector's continued positive impetus on CPI will force the Fed to maintain a more hawkish stance, delay interest rate cuts or slow down the pace of easing, thereby making it more difficult for the Fed to balance policies between “preventing inflation” and “steady growth.”

This round of high profits in the refining industry is not a simple short-term phenomenon; it reveals the deep contradiction between insufficient investment in refining infrastructure and geopolitical shocks in the context of the global energy transition. As long as the supply of refining production capacity cannot be released quickly, high refining profit margins will continue to penetrate all levels of the US economy as an “invisible tax.” This also means that America's inflation management will no longer only depend on the face of crude oil supply, but will also have to endure the long-term stickiness test brought about by the refining side.