US oil refineries are currently operating at full capacity, running at "breakneck speeds" due to renewed conflicts in the Middle East and the ongoing war in Ukraine. These geopolitical events are severely restricting global supplies of essential fuels, such as diesel, putting pressure on American refiners to compensate. The heightened demand and supply constraints have led to record-high refining margins in both the US and Europe.
The global fuel supply crunch has resulted from significant disruptions, including major refineries in the Middle East being partially or entirely offline since the Iran conflict began on February 28, triggered by the closure of the Strait of Hormuz. Additionally, Russia's refining sector has suffered from Ukrainian drone attacks, leading to domestic fuel shortages and reduced diesel exports. These disruptions have collectively removed approximately 5 million barrels per day of global refining output in the second quarter compared to the previous year.
The US has attempted to mitigate the global shortage by increasing exports of crude, gasoline, diesel, and aviation fuel. However, its own crude inventories, including emergency reserves, have fallen to their lowest levels since 1984, reflecting the strain on domestic supplies. Gasoline stocks are at their thinnest seasonal levels since 2012, and diesel inventories, though recently recovering, were at their lowest in over two decades. The ability of the US to continue supplying international markets is becoming increasingly constrained as domestic stockpiles diminish and summer fuel demand peaks.
The benchmark US 3-2-1 refining margin, or crack spread, recently surged to nearly $70 a barrel, an all-time high, while Northwest European refining margins climbed to seasonal records near $30 a barrel. European diesel margins have jumped to a record of around $65 a barrel, and US gasoline margins are near the record levels seen in 2022. These extraordinary premiums paid to refiners indicate severe competition for scarce fuel supplies, suggesting that current market conditions could lead to demand destruction and a wider economic impact if fuel stocks continue to run low.
