Refining Bottleneck and Chinese Imports Set Stage for Inflationary Shock

A potential energy crisis is brewing in the global market, similar to the one seen in 2022. The Strait of Hormuz remains blocked, and economic indicators suggest a creeping energy crisis. However, this time around, the inflationary shock may have a different structure and scale.

The main bottleneck in the hydrocarbons market is not crude oil but refining capacity. Refining margins are at an all-time high, with no signs of change. This means that even if crude oil supply increases, refineries cannot quickly process it, leading to a situation where crude becomes cheaper despite fuel shortages.

China's role in the market is significant. The country has cut oil imports by almost half since the beginning of the war in Iran, removing about 5-10% of global demand from the market. China also holds the largest oil and fuel inventories in the world, which it uses to shield itself from price inflation.

The factors driving further inflation increases are unavoidable, while the forces suppressing prices are temporary. The demand factor and pricing power are largely absent, but rising unemployment, consumer weakness, and limited pricing power will eventually affect inflation when fuel prices reach consumers.

Some companies will be better equipped to handle the coming market conditions than others. Retailers with economies of scale and refineries with strong cost control will do well, while low-cost airlines, subprime-focused finance companies, and casual dining restaurants may struggle.