War in Iran tightens global refining system; high fuel prices could last years

Global refining capacity has been pushed to the edge by the war in Iran, leaving diesel and gasoline markets tight and raising the risk that high fuel prices could persist for years, analysts warn.

Key disruptions and numbers

Although the crude oil market has adjusted relatively well to the loss of a significant share of Middle Eastern supplies, the ability to replace missing refined fuels is much more limited. Brent is trading at about 90 dollars per barrel, roughly 25 percent above its level at the start of the conflict on February 28, but still below the wartime peak of 118 dollars. Refined products have risen far more: diesel prices in Europe are up by more than 70 percent since the start of the war, while gasoline in the United States has climbed by about 60 percent.

The International Energy Agency (IEA) says the conflict has taken more than 20 percent of Middle Eastern refining capacity offline from a pre-war level of 9.6 million barrels per day. Closure of the Strait of Hormuz has constrained fuel exports, and crude shortages from Gulf producers have forced many refineries—particularly in Asia—to cut runs.

Further disruption has come from Ukrainian attacks on Russian energy infrastructure. Russian refining runs have fallen by nearly 30 percent in recent months to below four million barrels per day, prompting Moscow in July to ban diesel exports.

Refining margins have surged. In Europe the diesel margin has more than tripled since February and topped 75 dollars per barrel, while in the United States the diesel margin rose by more than 140 percent and reached a record 100 dollars per barrel earlier this week. At the same time, strategic fuel buffers that softened the initial shock are nearly depleted: global oil stocks fell from March through July at a pace of 3.5 million barrels per day, more than three percent of daily global demand.

The U.S. Energy Information Administration expects inventory draws to continue through the end of the year. U.S. diesel stocks are at the lowest seasonal level in three decades and gasoline inventories are at their lowest seasonal level since 2012. Global refining throughput in the second quarter was 5.1 million barrels per day lower than a year earlier. Higher prices have knocked roughly four million barrels per day off demand for refined products, but a shortfall of just over one million barrels per day remains.

Outlook risks are tilted to the downside. Refining throughput is expected to be 4.1 million barrels per day below last year in the third quarter while demand is projected to fall by only 2.4 million barrels per day, meaning supply is shrinking faster than consumption. More than 20 refineries across the Gulf have been damaged in the conflict, and repairs of critical equipment—compressors, heat exchangers and specialized catalysts—will take time. China, the world’s second-largest refiner, has sharply cut runs during the war and limited fuel exports, which also tightens the market.

While lower consumption driven by high energy bills could eventually ease the shortfall, urgent needs to refill inventories and, in some cases, to rebuild strategic stocks mean demand for refining could remain elevated for years. The price shock is already feeding into consumer inflation: U.S. consumer prices rose 3.4 percent year-on-year in July, with energy costs up 14.7 percent and gasoline up 24.6 percent. Inflation in the euro area reached 2.9 percent, driven by a ten percent rise in energy costs, and Japan’s producer price index rose 7.2 percent in July.

Policy expectations that the shock will be brief appear overly optimistic to many observers, particularly for Europe and Asia where liquid natural gas prices have also jumped. Last week U.S. President Donald Trump warned Americans to prepare for higher energy prices. Nearly six months after the outbreak of the war in Iran, the agencies conclude the energy crisis shows little sign of a quick end as stocks run down and conflict-related disruptions continue to strain an already overstretched refining system.

Photo: press material from the event