The global fuel market is currently under immense strain, largely due to the six-month-long war involving Iran, which has resulted in significant disruptions to oil supply and refining capacity. Reuters calculations indicate that almost half of the world's oil, specifically over 43% of global oil production, originates from conflict-affected countries. This crisis has surpassed previous energy crises in its severity. More than 10% of global refining capacity is offline, leading to critically low global fuel stocks and a rally in fuel prices, which is exacerbating inflation and government debt.
The conflict intensified following U.S. and Israeli attacks on Iran six months ago, triggering the largest oil supply crisis on record. The closure of the Strait of Hormuz, a critical waterway for one-fifth of global oil supply, has severely hampered refining operations, particularly in Asia. Additionally, Ukrainian attacks on Russian refineries in July led Moscow to suspend diesel exports, further reducing global fuel production. The International Energy Agency (IEA) reported that global refinery throughput in July fell to 81 million barrels per day (bpd), a 6% decrease from the previous year, which is nearly 5 million bpd below demand.
Despite the widespread disruptions, Middle Eastern oil producers have managed to maintain some stability in global crude prices through covert shipments out of the Persian Gulf, easing fears of an energy-driven inflation spike. However, this has not alleviated the shortage of refined fuels, especially in Asia. Asia's imports of key refined fuels like diesel, jet fuel, and gasoline are down 21% from pre-conflict levels, dropping by 1.49 million bpd. Less wealthy Asian countries like Indonesia and the Philippines are disproportionately affected by these shortages, while wealthier nations like Australia have maintained import levels, albeit at a higher cost. Refining margins have skyrocketed, with the profit of making a barrel of gasoil in Singapore reaching $71.29 in August, a 226% increase from February.
U.S. refiners have seen a bonanza, with benchmark margins exceeding $50 a barrel, more than double their 10-year average, leading to record earnings for major companies like Valero and Exxon Mobil. The U.S. has ramped up exports of crude, gasoline, diesel, and jet fuel to record levels, helping to avert a more catastrophic supply shock. However, global fuel inventories are being depleted, and the extensive damage to refining infrastructure in the Middle East and Russia is expected to reduce processing capacity for years, creating a dangerous dilemma for refiners. While high margins incentivize continuous operation, the risk of failures in an already stretched market is high.
