The profitability of Europe’s oil refineries has declined sharply amid rising crude prices and soaring transportation costs, raising the possibility of production cuts as the continent contends with high prices for refined fuels. Over the past month, input costs for refineries surged due to a jump in physical crude oil prices and unprecedented expenses for hiring supertankers. However, the prices for some refined products, including gasoline and naphtha, did not increase enough to compensate for these elevated costs.

Refinery margins in northwest Europe, measured as crack spreads, fell from $54 per barrel in early September to a negative $11 per barrel on October 5, and have since recovered slightly to around $3 per barrel, according to London Stock Exchange Group data. The International Energy Agency (IEA) noted that “crippling crude acquisition and freight costs” have significantly squeezed margins in both Europe and Asia in recent weeks.

The decline in refinery margins comes amid tightening global diesel markets, with prices for diesel and jet fuel having risen substantially this year. Despite this, refiners have limited ability to adjust output proportions among various petroleum products, which restricts their flexibility to fully benefit from higher prices in specific segments.

Lower-margin outputs such as naphtha and high-sulphur fuel oil have seen crack spreads deteriorate further into negative territory, indicating that refineries may still reduce production if profitability remains weak. Gasoline crack spreads also turned negative at the end of September. Benedict George, head of products pricing at Argus, said refineries are currently uncertain about near-term operational strategies. He added that while no production cuts have been made yet, marginal refiners might consider scaling back operations if negative margins persist for more than three weeks.

Additional pressure on refinery costs has come from heightened concerns over oil supply disruptions in the Middle East, particularly the Gulf region, which prompted refiners to pay significant premiums over benchmark prices for future crude deliveries last month. Meanwhile, benchmark physical crude prices, exemplified by Dated Brent contracts for delivery in 10 to 30 days, climbed by over 13 percent in the past month—far exceeding the modest 1.2 percent rise seen in front-month futures contracts during the same period. This spread between physical and futures prices has pushed crude purchase costs at refinery gates to record highs.

Analysts and the IEA have cautioned that should refinery profitability deteriorate further, marginal facilities in Europe and Asia may implement economic run cuts, which could exacerbate supply tightness and contribute to sustained high prices for refined products through the end of the year.