The escalation of the war in the Middle East threatens to upend the plans of Asian refineries to boost fuel production in August, keeping global oil stockpiles tight and reinforcing upward pressure on prices, unless China manages to cover the supply shortfall. Asian refining companies, which were expected to lead the recovery of global fuel production in the third quarter, now face fresh uncertainties as strikes between the US and Iran have once again restricted crude exports from the Persian Gulf through the Strait of Hormuz, where prior to the war roughly one-fifth of global oil traffic passed.
Houthis threaten Saudi exports – New pressure on the oil market
The situation is worsening following threats by Iran-backed Yemeni Houthis to block Saudi Arabian oil exports from the Red Sea. Brent crude surged on Wednesday by 4.5% to $95.3 per barrel, reaching its highest level in seven weeks and extending gains for a fourth consecutive session. According to analytics firm Energy Aspects, over 3 million barrels of oil per day bound for Asia via the Bab el-Mandeb strait could require significantly longer routes if the threat materializes. On Tuesday, three tankers carrying Saudi oil to China and India via Bab el-Mandeb altered course and headed toward the Suez Canal. Asian refiners, which had already secured crude supplies for August, are now preparing for delays in shipments from the Middle East.
Russian fuel embargo reinforces pressure
At the same time, Russia’s decision to ban diesel exports following Ukrainian drone attacks on refineries is further tightening the global supply of petroleum products. The dual pressure from the Middle East and Russia has driven refinery profit margins to record levels in the US and Europe, while in Asia they stand at a two-month high. “Margins will stay elevated. There is simply not enough capacity globally to handle the combination of the Hormuz closure and restricted Russian exports. Prices must rise to ration end demand,” stated Sparta Commodities analyst Neil Crosby. For diesel and jet fuel, Asian refining margins have surpassed $65 per barrel, up from just over $20 before the start of the war.
Uncertainty over global refining recovery
Prior to the escalation of the crisis, the International Energy Agency (IEA) predicted that global refineries would increase output in the third quarter to 81.6 million barrels per day, a rise of over 4% compared to the second quarter. The recovery was expected to be driven primarily by Asia, though production would remain roughly 4% below levels seen a year ago. Wood Mackenzie estimated that Asian output would rise to 30.37 million barrels per day in August, up from around 28 million barrels in May and June. However, this recovery could stall if flows through the Strait of Hormuz drop further and Saudi exports require additional time to reach Asia via West Africa.
China as the "balancer" of the global fuel market
China represents the key factor that could cover part of the deficit in global supply. Chinese refineries were operating at just 58% of their capacity in June, leaving significant room to scale up refining production. Furthermore, Beijing holds substantial crude reserves and is less reliant on immediate imports. According to Reuters, Wood Mackenzie estimates that Chinese refining output could rise to 13.96 million barrels per day in August, up from 12.63 million barrels in June. Meanwhile, independent Chinese refiners that have purchased cheaper Middle Eastern crude are expected to ramp up production.
US and Europe operating at limits
Refineries in the US and Europe are expected to run production at maximum possible levels to exploit historically high profit margins, but they possess limited capacity for further increases. In Europe, diesel profit margins reached a record high of $66.25 per barrel following the ban on Russian exports. In the US, the spread between crude and finished products—a core indicator of refinery profitability—touched nearly $70 per barrel. Energy Aspects analyst Raul Calzada noted that refineries are already running at historically high capacity utilization. “In recent months we have seen several refineries marginally increase production beyond normal operating levels,” noted Trey Hamblet of Industrial Info Resources. However, companies are now focusing more on diesel production, where margins are higher, leaving limited supply for other fuels. The oil market thus faces a new explosive mix: geopolitical tensions, export restrictions, and refineries operating at the absolute limit of their capabilities.
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