Tight Fuel Supplies and Rising Geopolitical Tensions Keep Global Energy Markets on Edge

Global fuel markets are facing prolonged pressure as low inventories and escalating geopolitical risks threaten to keep prices elevated for longer. The intensifying conflict between the United States and Iran is disrupting Asian oil refiners’ plans to increase production in August, raising concerns that global fuel stocks will remain constrained unless China steps in to compensate for the shortfall.

Asian refiners had been preparing for a recovery in global fuel production during the third quarter, relying on expectations of more stable crude supply. However, renewed attacks between the US and Iran have once again disrupted crude exports from the Gulf region, with shipments through the Strait of Hormuz severely affected. Before the conflict, the strategic waterway handled around one-fifth of global oil flows.

Adding further uncertainty, Yemen’s Iran-backed Houthi movement has warned that it could target Saudi Arabian exports passing through the Red Sea. Such a move could force more than 3 million barrels per day of Saudi crude that had been destined for Asian markets through the Bab el-Mandeb Strait to take significantly longer alternative routes, according to research firm Energy Aspects.

The impact was already visible on Tuesday, when three tankers carrying Saudi crude shipments bound for China and India through Bab el-Mandeb reversed course and headed toward the Suez Canal instead.

The disruption has left Asian refiners, which had arranged crude supplies for August operations, preparing for possible delays in Middle Eastern deliveries. Meanwhile, refiners in the United States and Europe are already operating close to their maximum capacity, limiting their ability to offset any supply shortages.

At the same time, Russia’s decision to suspend diesel exports following Ukrainian drone attacks on its refineries has added further strain to global fuel markets. The combination of restricted Russian product exports and Middle East supply risks is tightening availability of gasoline, diesel and jet fuel, pushing prices higher.

The surge in fuel prices has driven refinery profit margins to historic levels in the US and Europe, while Asian refining margins have climbed to their strongest levels in two months.

“Margins are set to stay high. There is simply not enough capacity in the world to deal with the double whammy of Hormuz closure and Russian export bans. Prices need to go up to lower end-user demand,” said Sparta Commodities analyst Neil Crosby.

For Asian refiners producing gasoil and jet fuel, margins have increased sharply to more than $65 per barrel, compared with slightly above $20 per barrel before the war began.

Expected Refinery Recovery Faces New Uncertainty

Global refinery activity had been projected to strengthen during the third quarter. The International Energy Agency said on July 10 that worldwide refinery processing was expected to average 81.6 million barrels per day during the period, representing an increase of more than 4% from the second quarter. The recovery was expected to be driven largely by Asia, although total output would still remain about 4% below levels seen a year earlier.

In Asia, consultancy Wood Mackenzie had forecast refinery throughput to rise to 30.37 million barrels per day in August, recovering from approximately 28 million barrels per day recorded in May and June.

However, this expected rebound is now at risk if crude flows through the Strait of Hormuz decline further and Saudi exports require an additional month to reach Asian buyers after being rerouted around Africa’s western coast.

Taiwan’s Formosa Petrochemical Corp (FPCC), one of Asia’s major fuel exporters, had planned to increase refinery operations to 480,000 barrels per day in August, equivalent to nearly 90% of its processing capacity, according to President K.Y. Lin.

“While FPCC has managed to secure crude supplies for August arrival, the delivery and arrival of some of these cargoes remain uncertain for now, given the resumption of Middle East conflict,” Lin said.

“There should still be a trickle in crude exports from the Strait of Hormuz, but such volumes still cannot be compared with pre-war levels.”

A Chinese refining executive also said that delays could affect cargoes scheduled for loading in July and August, making it difficult for refiners to increase production. The executive declined to be identified because he was not authorised to speak publicly.

China May Become Key Source of Additional Fuel Supply

While refiners elsewhere in Asia are operating close to normal levels, China has significant spare capacity that could help ease global fuel shortages.

Asian refineries outside China are currently running at between 93% and 95% of their pre-war operating levels, according to Kpler analyst Sumit Ritolia.

China, however, operated at only 58% of its refinery capacity in June, leaving substantial room to increase output. The country is also less exposed to imported crude disruptions than many other nations because it maintains large oil inventories that can be used if necessary.

Chinese refiners have deliberately limited production due to weak domestic fuel demand and government restrictions on fuel exports. Beijing relaxed export controls for July, although it remains uncertain whether those measures will continue into August.

Wood Mackenzie expects China’s refinery throughput to rise to 13.96 million barrels per day in August, compared with 12.63 million barrels per day in June.

Independent Chinese refiners that have purchased discounted Middle Eastern crude are also expected to increase production, according to trade sources. Shenghong Petrochemical’s 320,000-barrel-per-day refinery in Jiangsu province, for example, is expected to restart operations in mid-August following a major maintenance shutdown.

US and European Refiners Operating at Maximum Levels

Refiners in the United States and Europe are expected to continue running at very high rates during the third quarter in order to benefit from exceptionally strong margins, but analysts said their ability to increase production further is limited.

European diesel refining margins reached a record $66.25 per barrel following Russia’s diesel export restrictions.

In the United States, the crude-to-fuel products spread — a key measure of refinery profitability — climbed to a record level of nearly $70 per barrel late last week.

Energy Aspects analyst Raul Calzada said US refiners are already operating at record utilisation rates. Forecasts indicate that third-quarter refinery runs along the US Gulf Coast will increase by 200,000 barrels per day, representing a 2.1% rise from the previous year.

“In the past couple of months, we have witnessed several refiners marginally increase rates beyond their normal operating where possible,” said Trey Hamblet, an analyst at refinery tracker Industrial Info Resources.

Despite extremely low gasoline inventories at the US Gulf Coast, Hamblet said refiners have little incentive to maximise gasoline production because diesel currently provides stronger returns.

“They need to make as much diesel as possible because that’s where the margin is,” he said.

“So we are locked in this situation where all products get tight.”

With Middle East supply routes under pressure, Russian exports restricted and refiners worldwide operating near capacity, global fuel markets remain vulnerable to further disruptions. Unless additional production — particularly from China — enters the market, analysts expect elevated prices and tight fuel availability to persist.

By fLEXI tEAM