The role of refining costs and margins in HICP energy inflation

Prepared by Filippo Durero, Umberto Maglione, Ana-Simona Manu, Aidan Meyler, Mario Porqueddu, Tito Quadri and Ieva Rubene The conflict in the Middle East is continuing to shape energy prices amid significant uncertainty.Brent front-month crude oil prices increased to above USD 110 per barrel at the end of October, close to 60% above pre-conflict levels. As pressures on crude oil prices and their volatility remain elevated, shortages originating from the Middle East, coupled with outages in Russia, have also strained global refinery operations and the supply of refined products, pushing up consumer prices. Global refinery runs have fallen sharply compared with previous years, driven by reduced refinery activity in the Middle East, Russia and Asia (Chart A, panels a and b).Middle Eastern refineries were affected by reduced export capacity on account of the closure of the Strait of Hormuz, while Asian refineries reliant on Gulf crude oil have struggled with costly substitutions. China also curbed fuel exports as of March to safeguard domestic fuel supply, with significant cuts continuing until the end of June. However, the restrictions were eased temporarily in July and August. Russian refining capacity has also declined recently following a wave of Ukrainian attacks on energy infrastructure. In response, Russia extended its diesel and petrol export bans until the end of January 2027. For fuel producers, the diesel export ban remained in effect until 31 October 2026, although it was partially eased from 10 October following a supply agreement with the United States. As a result, seaborne diesel imports into the EU were down 56% and petrol imports down 52% at the end of September compared to pre-conflict levels amid limited substitution availability from other countries (Chart A, panel c). Developments in global refinery runs and EU seaborne imports of diesel products b) Total decline in refinery runs since the end of 2025 (change between 2025 and May 2026, million barrels per day) Sources: Bloomberg, International Energy Agency (IEA), LSEG, ECB and ECB staff calculations.Notes: In panel a), the dashed line represents IEA forecasts; “Range (2015-2025) excluding pandemic” excludes the period from March 2020 to December 2021. In panel b), “APAC” is the Asia-Pacific region excluding China, the Middle East and the EAEU; “EAEU” is the Eurasian Economic Union (Russia and other central Asian countries, according to IEA classifications). In panel c), “ROW” is the rest of the world; “Other Middle East” is the Middle East excluding Saudi Arabia; “Pre-pandemic” refers to the period from 1 January 2018 to 21 February 2020; “Pre-Ukraine war” refers to the period from 21 February 2020 to 24 February 2022; “Pre-Middle East conflict” refers to the period from 5 February 2023 (start of EU embargo) to 28 February 2026; “Middle East conflict” refers to the period since 28 February 2026. The latest observations are for July 2026 (monthly data) for panels a) and b), and 30 September 2026 (daily data) for panel c). The constrained supply of crude oil and refined products has led to a persistent increase in refining margins and costs globally, particularly for diesel (Chart B, panel a).This phenomenon underscores the interconnected nature of liquid fuel markets, where disruptions in one region, such as the Middle East or Russia, have ripple effects across the globe. Elevated diesel refining margins (crack spreads), which surged to around three times pre-Middle East conflict levels in Europe, reflect the tightness of global supply and the inability of regional markets to fully insulate themselves from external shocks (Chart B, panel b).[1]Petrol refining margins, also increased until September, but weakened sharply in October (Chart B, panel c). Recent international developments in crude oil and refined product prices and in refining costs and margins a) Brent crude and refined petrol and diesel prices in Europe b) Diesel refining costs and margins (crack spreads) c) Petrol refining costs and margins (crack spreads) Sources: Bloomberg, LSEG, ECB and ECB staff calculations.Notes: In panel a), all series represent physical/spot prices. Panels b) and c) show diesel and petrol/gasoline refining margins, calculated as product prices minus the regional crude benchmark. All series use the nearest available futures contract. European spreads use ARA ultra-low-sulphur gasoil and Eurobob gasoline against Brent crude. Asian spreads use Singapore 10 ppm gasoil and 92 RON gasoline against Dubai crude. US spreads use New York Harbor ULSD and RBOB gasoline against West Texas Intermediate (WTI) crude. The latest observations are for 28 October 2026. In addition to some structural shifts, refining margins in the euro area, measured in real terms, have been elevated and volatile since 2020 (Chart C, panel a).Margins fell in 2020 during the COVID-19 pandemic, rebounded strongly following Russia’s full-scale invasion of Ukraine, peaked in early 2023, and eased back towards pre-pandemic levels in the second half of 2024. Margins have surged again since the start of the Middle East conflict. This heightened volatility follows a gradual increase in refining margins over the past two decades, driven by structural shifts in the sector.[2]Historically, margin spikes have been short-lived, as they create incentives to adjust the supply-demand balance as well as the product mix of refineries. The current disruption may be harder and slower to correct. Developments in prices of liquid fuels for transport and heating b) Decomposition of price inflation for liquid fuels (annual percentage changes, percentage point contributions) Sources: Eurostat, LSEG, European Commission (Weekly Oil Bulletin, WOB) and ECB staff calculations.Notes: Liquid fuel prices are calculated as a weighted average of transport (diesel and petrol) and heating oil prices using HICP weights. Panel a): The individual components are shown in 2026 euro cent per litre deflated by HICP inflation. Data for 2026 refer to the year up to 28 October 2026. Panel b): The latest observations are for September 2026. There have also been changes in the dynamics of distribution costs and margins and the tax component of liquid fuel prices since the pandemic and since Russia’s invasion of Ukraine.Distribution costs and margins rose in 2020 in real terms (perhaps as integrated oil companies sought to offset the decline in sales volumes and refining margins) but have co-moved with refining margins since 2022 and remain at a higher level than before the pandemic. Since 2022, changes in excise duties have partly offset these movements. Having been broadly stable in real terms until 2022, excise duties were reduced in 2022 and 2023. In 2026, the reductions in excise duties, reflecting fiscal measures to curb energy price increases, have been small compared with the rises in crude oil prices and refining and distribution margins.[3] For consumer prices, changes in refining margins have occasionally been almost as important as developments in crude oil prices, particularly during energy crises (Chart C, panel b).Since the end of February 2026, refining margins have substantially increased, pushing up the rate of inflation for liquid fuels for transport and heating.[4]Given their importance for HICP inflation, it is useful to capture these dynamics in forecasting models. A real-time forecast evaluation using the ECB’s short-term inflation projection (STIP) energy model suggests that using financial futures to forecast prices for liquid fuels for transport and heating in the euro area results in small improvements, particularly at horizons of 3 to 11 months over the full sample and one month ahead in the pre-pandemic period (until 2019).[5]The benefits are less evident during the high-inflation period, when futures prices generally underpredicted subsequent price developments. The STIP energy model shows that refining margins can significantly affect energy inf