Mideast Escalation Threatens Global Oil Refining Recovery

The escalating conflict between the United States and Iran, along with broader geopolitical tensions in the Middle East, poses a significant threat to the anticipated recovery of the global oil refining sector. Disruptions to key crude oil supply routes in the region and attacks on refinery infrastructure are hindering production ramp-up plans, especially for Asian refiners, leading to tight supply in global fuel markets. [2, 4]

As tensions have mounted, Gulf crude exports through the Strait of Hormuz, a waterway through which a fifth of the world's oil previously passed, have been severely throttled. Additionally, Yemen's Iran-aligned Houthis have threatened to block Saudi Arabian exports from the Red Sea via the Bab el-Mandeb waterway, forcing over 3 million barrels per day of Saudi crude destined for Asia to take much longer routes. On Tuesday, three tankers carrying Saudi crude bound for China and India through Bab el-Mandeb were observed making U-turns, heading towards the Suez Canal. [2, 4] Refineries in the region have also been directly impacted; the Sitra Refinery in Bahrain sustained damage to its diesel hydrotreater and hydrogen production units, while Israel's Haifa Refinery saw its capacity temporarily derated. Qatar's Ras Laffan and Mesaieed refineries experienced precautionary shutdowns and reduced throughput, and Kuwait's Mina Al-Ahmadi and Mina Abdullah refineries were damaged, operating at reduced capacity or remaining offline. [1, 3] Compounding this, Russia's ban on diesel exports following Ukrainian drone attacks on its refineries has further tightened the global supply of refined products. [2]

These developments are contributing to tight global fuel stocks and pushing up prices for gasoline, diesel, and jet fuel. While processors in the US and Europe are already running near capacity, Asian refiners, who had lined up crude supplies for August, are now bracing for shipment delays from the Middle East. [2, 4] Refiners' profit margins, or crack spreads, have surged to historic levels, reaching record highs in the US and Europe and two-month highs in Asia. Specifically, gasoil and jet fuel margins in Asia jumped to over $65 a barrel, up from just above $20 before the conflict. [2, 4] Crude oil prices, while retreating from a peak of $118 a barrel, are currently hovering around $85, remaining significantly higher than pre-conflict levels of approximately $65. [5, 7]

The International Energy Agency (IEA), in its July report, had projected global refinery runs to increase to 81.6 million barrels per day (bpd) in the third quarter, a more than 4% rise from the second quarter, led by a recovery in Asia. Wood Mackenzie had estimated Asian throughput to reach 30.37 million bpd in August. However, this recovery could stall if shipments through the Strait of Hormuz decline further and if Saudi exports to Asia take an additional month, circumventing the west coast of Africa. [2]

The broader economic and political context of the Middle East conflict also has significant implications. Rising energy costs are fueling global inflationary pressures. While UK inflation saw a temporary slowdown in June due to a brief de-escalation of the conflict, the renewed tensions are pushing energy costs upward once again. [9] The IEA, while maintaining its expectation of a market surplus by the fourth quarter of 2026, warns that a breakdown in the fragile US-Iran peace process could entirely upend this forecast and bring shipping to a standstill. [6] The agency emphasizes the need for vigilance, despite emergency oil stock releases (approximately 290 million barrels out of a planned 400 million) and the utilization of alternative supply routes. [7, 8]

Analysts anticipate that refinery profit margins will remain elevated. Neil Crosby, an analyst at Sparta Commodities, stated that there is simply not enough global capacity to manage the dual impact of the Hormuz closure and Russian export bans. According to Crosby, prices need to increase to reduce end-user demand. [2, 4] Overall, a rapid recovery in global refinery output is not expected in the short term. Even if flows through the Strait of Hormuz normalize, Middle East refineries may require months to fully ramp up operations. IEA Executive Director Fatih Birol highlights that while crude supplies are stable, refined fuel markets remain tight due to lagging refinery output. [7, 8]