Shell plc SHEL, one of the world's leading energy companies, faced a significant challenge at its Pernis refinery in Rotterdam, the largest in Europe. A gas leak forced the company to halt its Hycon unit — a fuel-making unit with a production capacity of 25,000 barrels per day. This unexpected incident has the potential to curtail the supply of diesel, a vital component of our modern economy.
The Significance of Pernis Refinery
Before we delve into the details of the incident and its implications, it's essential to understand the scale and importance of the Pernis refinery. With a daily capacity of 404,000 barrels, it plays a key role in meeting the energy demands of Europe. The refinery's strategic location in Rotterdam, a major port city, allows it to efficiently process and distribute petroleum products across the continent.
The Impact on Diesel Production
The temporary shutdown of the Hycon unit that produces 25,000 barrels of fuel per day is a cause of concern. Diesel, a versatile and widely used fuel, is a critical component in transportation, agriculture and industry. Any disruption in its supply chain can have cascading effects on various sectors of the economy.
Fuel Price Dynamics
One immediate consequence of this leakage is the potential increase in diesel prices. The cost of fuel is inherently linked to the forces of supply and demand, and when supply is disrupted, prices tend to rise. This situation has been worsened by other external factors, such as the ongoing geopolitical tensions and the loss of access to Russian crude oil.
Diesel's Premium to Brent Crude
In recent months, the premium of diesel to Brent crude oil has strengthened significantly. Before the outbreak of the Ukraine conflict, this marker was at approximately $30 per barrel. However, as supply challenges mounted, the premium surged. This underscores the importance of diesel in today's energy landscape.
European Refineries and Their Challenges
It's worth noting that European refineries have been facing a series of challenges lately. The loss of access to Russian crude oil due to geopolitical tensions has strained the supply of raw materials. Additionally, an unusual spike in temperature during the summer has further curtailed the production of oil products.
In August, the International Energy Agency (IEA) issued a report highlighting the challenges faced by European refineries. The agency pointed out that the combination of restricted access to Russian crude and the heatwave-induced reduction in output has led to concerns about meeting the energy needs of the continent.
The unplanned outage at Shell's Pernis refinery has raised concerns about the supply of diesel in the European market. This incident, coupled with other ongoing challenges, has contributed to an increase in diesel prices. As a result, businesses as well as consumers may experience the effect of this disruption in the form of higher fuel costs.
Zacks Rank and Key Picks
Currently, SHEL carries a Zacks Rank #3 (Hold).
Some better-ranked stocks for investors interested in the energy sector are CVR Energy CVI and USA Compression Partners USAC, both sporting a Zacks Rank #1 (Strong Buy), and Archrock AROC, carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
CVR Energy is valued at $3.39 billion. In the past year, its shares have risen 19.4%.
CVI currently pays a dividend of $2 per share, or 5.93% on an annual basis. Its payout ratio currently sits at 30% of earnings.
USA Compression Partners is worth approximately $2.21 billion. USAC currently pays a dividend of $2.10 per unit, or 9.34% on an annual basis.
The company offers natural gas compression services to oil companies and independent producers, processors, gatherers, and transporters of natural gas and crude oil. It also operates stations.
Archrock is valued at around $1.91 billion. It delivered an average earnings surprise of 15.08% for the last four quarters and its current dividend yield is 5.08%.
Archrock is a provider of natural gas contract compression services and aftermarket services of compression equipment.
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