Iran War Drives Global Refining Crisis as Fuel Prices Stay High
The Iran war has pushed the global oil refining industry to the brink, potentially keeping diesel and gasoline prices elevated for years. While crude oil markets adapted to the loss of Middle Eastern supplies, refiners faced more limited options. Benchmark Brent crude oil is around $90 a barrel, up 25% since the conflict began but down from its wartime peak of $118. However, refined products like diesel and gasoline have not seen the same relief, with European diesel prices surging over 70% and U.S. gasoline prices climbing around 60% since the war started.
The war disrupted over 20% of the Middle East’s refining capacity, while the closure of the Strait of Hormuz suppressed fuel exports. This strain was worsened by Ukrainian strikes on Russian energy infrastructure, cutting Russia’s refining throughput by nearly 30%. Diesel refining margins in Europe, Asia, and the U.S. have surged to unprecedented levels, with European diesel cracks tripling since February and U.S. diesel margins reaching a record $100.
Pre-war fuel stockpiles have mitigated the crisis somewhat, but these buffers are now depleted. Global oil stocks fell by 3.5 million barrels per day between March and July, and U.S. diesel inventories are at their lowest in three decades. The disruptions have created a significant gap in global fuel production, with refinery runs in the second quarter being 5.1 million bpd lower than a year earlier. Demand for refined products fell by 4 million bpd, leaving a shortfall of over 1 million bpd.
Even if a diplomatic breakthrough reopens the Strait of Hormuz, the refined product market may not see quick relief due to damaged refineries and stretched lead times for crucial equipment. China’s response to tightening supplies will also be critical, as demand destruction could be more significant than currently projected. The urgent need to replenish fuel inventories is expected to add upward pressure to refining demand for years, raising the prospect of sustained energy-driven inflation.