Gasoline prices in the European wholesale market have collapsed in recent months relative to crude futures, but diesel margins remain unprecedentedly high, creating a dilemma for refiners heading into winter.

Argus Eurobob oxy gasoline barges hit a 19-month low to front-month Ice Brent futures on September 1, having fallen steadily throughout the summer. The collapse in gasoline refining margins is something of an outlier, as prices for other fuels remain in unprecedentedly high territory. Restricted-origin diesel cargo assessments in north west Europe are on much firmer ground. There are a number of factors behind the divergence in diesel and gasoline margins.

Record natural gas prices are causing a headache for refiners as well as politicians. Refineries need natural gas to extract hydrogen for input into diesel-producing units. The cost of producing hydrogen has roughly trebled since June, making diesel more expensive to produce than gasoline, therefore bolstering prices.

The diesel market is also pricing in uncertainty over supply, in anticipation of the deadline for EU sanctions on Russian oil imports in February 2023. Russia still accounts for around 50% of Europe’s diesel imports, despite self-sanctioning among many buyers and some countries having already halted Russian imports, including the UK.

European gasoline supply will see little change from Russia sanctions on the other hand. Europe is a producing region of gasoline and relies on exports to to stay on top of its structural oversupply. Gasoline margins fell under heavy pressure in recent months because of weak demand on those export routes, leaving supplies to swell locally. Refiners will therefore be facing a balancing act between the two products. Ramping up crude runs to cash in on diesel margins could further pressure gasoline prices. The alternative of increasing output from secondary cracking units also poses problems — diesel-producing hydrocrackers are among the most sensitive to natural gas prices, and refiners may be deterred from trimming back gasoline-producing fluid catalytic crackers as the 30% diesel yield in those units is keeping margins positive.

This dynamic is unlikely to change dramatically in the near future with sanctions deadlines on Russia, and a likely gas supply crunch and economic slowdowns.