Refined Fuel Supply Fears Grow as Gasoline, Diesel Prices Stay High

Damage to global refining facilities from the Iran war may keep gasoline, diesel and other refined fuel prices elevated even if crude oil prices stabilize.

Reuters reported on August 20 that columnist Ron Bousso wrote the oil market adapted relatively quickly after the outbreak of the Iran war, but the refining industry has little replacement capacity, meaning it could take significant time for supply to normalize.

Brent crude is trading at about $90 a barrel, roughly 25% above its level on February 28, when the war began. That is still far below the $118 reached during the conflict. European diesel prices, by contrast, have surged more than 70% since the war started, while US gasoline prices have climbed about 60%.

The International Energy Agency said the war has knocked out more than 20% of the Middle East's 9.6 million barrels a day of refining capacity. The closure of the Strait of Hormuz, combined with reduced crude supplies from the Gulf, has also lowered operating rates at Asian refiners.

Disruptions to Russian refining output are adding to supply pressure. Russia's refinery throughput has fallen about 30% over the past several months to below 4 million barrels a day following Ukrainian attacks on energy infrastructure. The Russian government also banned diesel exports in July.

Refining margins have jumped sharply. Europe's diesel crack spread has more than tripled since February to above $75 a barrel, while US diesel margins have risen more than 140% to a record $100 earlier this week.

Shrinking inventories are adding to the strain. The US Energy Information Administration said global oil inventories fell by 3.5 million barrels a day from March through July. US diesel inventories dropped to their lowest seasonal level in 30 years, while gasoline stockpiles fell to their lowest since 2012.

The decline in refining output is outpacing the drop in demand. The IEA said global refinery runs in the second quarter fell by 5.1 million barrels a day from a year earlier, while demand for refined products declined by 4 million barrels a day. That left the supply shortfall at more than 1 million barrels a day.

The refined fuel market will still need time to recover even if the Strait of Hormuz reopens. More than 20 refining facilities in the Gulf were damaged during the war, and repairs may be slow because procurement times for key equipment such as compressors, heat exchangers and specialized catalysts have lengthened.

If shortages of refined fuels persist, higher energy costs could push inflation up again. US consumer prices rose 3.4% in July from a year earlier, while energy prices increased 14.7% and gasoline prices climbed 24.6%. Upward pressure from energy costs is also continuing in the euro area and Japan.

Bousso wrote that if the current refined fuel supply crunch persists, market expectations for a short-lived spike in energy prices may prove too optimistic. Even if crude prices stabilize, the pace of refinery repairs and the rebuilding of global inventories will be key variables for energy prices going forward.