The global energy crisis has shifted from an oil supply shock to a critical fuel supply crisis, primarily due to war and export restrictions limiting refinery output. This situation has led to record-high prices for transportation fuels like diesel and gasoline. For instance, the diesel crack spread, a measure of refining profitability, surged to $102 a barrel, nearly tripling pre-war levels, as refiners capitalize on these shortages.
Several factors contribute to the scarcity. Middle Eastern processing capacity is estimated to be 2.9 million barrels per day (bpd) below pre-war levels in Q2 and 2.2 million bpd lower in Q3. Ukrainian attacks have pushed Russian refining to a two-decade low, and reduced Chinese processing and fuel exports have further exacerbated the shortage. The International Energy Agency (IEA) reports that global refineries processed 5 million bpd less crude in July compared to a year prior.
Diesel is particularly affected, with IEA estimates showing exports from Russia, the Middle East, and major Asian suppliers were 1.3 million bpd lower in July than the previous year, representing about a fifth of seaborne trade. European diesel's premium over Brent crude has almost tripled to over $70 a barrel from around $25 at the start of the year. Jet fuel stocks in Amsterdam-Rotterdam-Antwerp are 39% below average, and gasoil (a diesel proxy) stocks are 24% below their five-year average. Consumers are experiencing the impact, with diesel at the pump being approximately 20% more expensive in July than in February across major European markets.
American refiners on the US Gulf Coast are operating at maximum capacity, with some in the Midwest and Rockies even deferring maintenance to meet the surging demand for refined products like gasoline, jet fuel, and diesel for both US and international markets. This aggressive operation, however, makes them vulnerable to disruptions like natural disasters, which could further escalate prices globally. The US has also drawn down its strategic petroleum reserves to around 300 million barrels, approaching its operational minimum of 200 million barrels, which could remove a key mechanism for cushioning crude prices and lead to higher gasoline prices and increased inflation.
Despite the current boom for refiners, the long-term outlook for refining capacity remains tight. While new and expanding plants in Asia, the Middle East, and Africa are expected to add some processing capacity, Morgan Stanley analysts project that refined fuel demand will grow by 2.5 million bpd over the next three years, while net capacity will only increase by 1.2 million bpd. Building new refineries can take eight to ten years, indicating that relief for consumers may be slow to materialize, even if crude oil prices fall due to a potential Iran peace deal.
