Iran war energy crisis is only getting started

The Iran war has pushed the global oil refining industry to the brink, signalling diesel and gasoline prices may remain elevated for years. Deal or no deal, the global energy inflation shock is far from over.

While oil markets adapted remarkably well to the abrupt loss of a fifth of global crude supplies from the Middle East during the conflict, workarounds for the refining industry have been far more limited.

The divergence between crude and fuel prices tells the story. Benchmark Brent crude oil is currently around $90 a barrel. Even though that is up about 25% from levels at the outbreak of the conflict on February 28, it is a significant retreat from the wartime peak at $118.

Refined products have not enjoyed the same relief. European diesel prices have surged more than 70% since the war began, while US gasoline prices have climbed around 60%.

This reflects a dramatic decline in refining output. The war knocked out more than 20% of the Middle East’s 9.6-million barrels per day (bpd) of refining capacity, according to the International Energy Agency (IEA), while fuel exports remain suppressed due to the closure of the Strait of Hormuz . The loss of Gulf crude, in turn, led many refiners, particularly in Asia, to curtail operations.

That strain was amplified by months of relentless Ukrainian strikes on Russian energy infrastructure. The attacks have cut Russia’s refining throughput by nearly 30% to below 4-million bpd in recent months, forcing Moscow to ban diesel exports in July.

Diesel refining margins in Europe, Asia and the US have surged to unprecedented levels. European diesel cracks have more than tripled since February to above $75 a barrel. US diesel margins have climbed more than 140%, reaching a record $100 earlier this week.

The crisis has been somewhat mitigated by pre-war fuel stockpiles, but that buffer is essentially gone.

Global oil stocks fell at a rate of 3.5-million bpd between March and July, equivalent to more than 3% of global oil demand, and are expected to continue declining until year-end, according to the US Energy Information Administration.

US diesel inventories are at their lowest for this time of year in three decades, while gasoline ⁠stocks are at their weakest seasonal level since 2012.

Taken together, the disruptions have created a hole in global fuel production the industry is struggling to fill.

Global refinery runs in the second quarter were 5.1-million bpd lower than a year earlier, according to the IEA.

Sky-high prices also reduced demand among businesses and consumers, but not by enough to fully offset the supply crunch. Demand for refined products last quarter fell by 4-million bpd, leaving a more than 1-million bpd shortfall.

The balance is expected to deteriorate further in the third quarter. Refinery runs are projected to be 4.1-million bpd lower year-on-year, while demand is expected to decline by only 2.4-million bpd.