By Laura Sanicola
    May 31 (Reuters) - Refiners worldwide are struggling to meet
global demand for diesel and gasoline, exacerbating high prices
and aggravating shortages from big consumers like the United
States and Brazil to smaller countries like war-ravaged Ukraine
and Sri Lanka.
    World fuel demand has rebounded to pre-pandemic levels, but
the combination of pandemic closures, sanctions on Russia and
export quotas in China are straining refiners' ability to meet
demand. China and Russia are two of the three biggest refining
countries, after the United States. All three are below peak
processing levels, undermining the effort by world governments
to lower prices by releasing crude oil from reserves. 
    Two years ago, margins for making fuel were in the dumps due
to the pandemic, leading to multiple closures. Now, the
situation has reversed, and the strain could persist for the
next couple of years, keeping prices elevated.
    "When the coronavirus pandemic occurred, demand for global
oil was not expected to fall for a long time, and yet so much
refining capacity was cut permanently," said Ravi Ramdas,
managing director of energy consultancy Peninsula Energy.
    Global refining capacity fell in 2021 by 730,000 barrels a
day, the first decline in 30 years, according to the
International Energy Agency. The number of barrels processed
daily slumped to 78 million bpd in April, lowest since May 2021,
far below the pre-pandemic average of 82.1 million bpd. 
    Fuel stocks have fallen for seven straight quarters. So
while the price of crude oil is up 51% this year, U.S. heating
oil futures are up 71%, and European gasoline refining margins
recently hit a record at $40 a barrel.             
    
    STRUCTURALLY SHORT
    The United States, according to independent analyst Paul
Sankey, is "structurally short" on refining capacity for the
first time in decades. U.S. capacity is down nearly 1 million
barrels from before the pandemic to 17.9 million bpd as of
February, the latest federal data available.
    LyondellBasell         recently said it would shut its
Houston plant that could process more than 280,000 bpd, citing
the high cost of maintenance.
    Operating U.S. refiners are running full-tilt to meet
demand, especially for exports, which have surged to more than 6
million bpd, a record. Capacity use currently exceeds 92%,
highest seasonally since 2017.    
    "It's hard to see that refinery utilization can increase
much," said Gary Simmons, Valero chief commercial officer.
"We've been at this 93% utilization; generally, you can't
sustain it for long periods of time." 
    The U.S. ban on Russian imports has left refiners in the
northeast United States short of feedstocks needed to make fuel.
Phillips 66         has been running its 150,000-bpd catalytic
cracker at its New Jersey refinery at reduced rates because it
cannot source low-sulfur vacuum gasoil, according to two sources
familiar with the matter.
    
    RUSSIA CAPACITY IDLED, CHINA RESTRICTING EXPORTS
    Russia has idled about 30% of its refining capacity due to
sanctions, according to Reuters estimates. Outages are currently
about 1.5 million bpd, and 1.3 million bpd will likely stay
offline through the end of 2022, J.P. Morgan analysts said.
    China, the second-largest refiner worldwide, has added
several million barrels of capacity in the last decade, but in
recent months has cut production due to COVID-19 restrictions
and capped exports to curb refining activity as part of an
effort to cut carbon emissions. China's throughput dropped to
13.1 million bpd in April, the IEA said, down from 14.2 million
bpd in 2021. 
    Other countries are also not adding to supply. Eneos
Holdings         , Japan's largest refiner, does not plan to
reopen recently closed refineries, a spokesperson told Reuters. 
    Some new projects worldwide have been hit by delays. A
650,000-bpd refinery in Lagos was supposed to open by the end of
2022 but is now delayed until the end of 2023. A source with
direct knowledge said the refinery has not yet hired a company
to do commissioning work which will take several months. 
    There have been some restarts. French major TotalEnergies
began the process of restarting the 231,000 bpd Donges refinery
in April after shutting in December 2020, while a 300,000-bpd
complex in Malaysia restarted earlier this month.             
            
    
    SUPPLY CRUNCH
    Diesel users have been squeezed, particularly in
agriculture. Ukrainian farmers are short, as supply from Russia
and Belarus has been cut off due to the war. 
    Sri Lanka, which is in the midst of a fuel crisis, shut its
only refinery in 2021 because it lacked sufficient foreign
exchange reserves to buy imported crude. It is looking to reopen
that facility because fuels are even more expensive.
    Brazil's state-owned Petrobras told the government that
importers may be unable to secure U.S. diesel for tractors and
other farm equipment to harvest crops in one of the world's
biggest agricultural producers.             
    “If refineries in the U.S. get damaged during hurricane
season, or anything else contributes to the market’s tightness,
we could be in real trouble," said a Brazilian refining
executive.
     
 

    
 (Reporting by Laura Sanicola; additional reporting by Florence
Tan in Singapore, Ron Bousso in London, Yuka Obayashi in Tokyo,
Sabrina Valle in Houston, Julia Payne in Lagos, and Uditha
Jayasinghe in Colombo, Sri Lanka; Editing by David Gregorio)