Escalating Mideast Conflict Threatens Global Oil Refining Recovery

An escalating military conflict between the U.S. and Iran is threatening to derail a planned recovery in global oil refining, with Asian producers facing potential crude shipment delays that could keep fuel supplies tight and prices elevated for an extended period.

Key Waterways Under Threat

Recent attacks have throttled crude oil exports through the Strait of Hormuz, a critical chokepoint through which a fifth of the world's oil supply previously transited. Compounding the issue, Iran-aligned Houthi rebels in Yemen have now threatened to block Saudi Arabian exports from the Red Sea, according to a Reuters report.

This could force more than 3 million barrels per day (bpd) of Saudi crude destined for Asia to take significantly longer and more expensive routes around Africa, research firm Energy Aspects noted. The disruption is already tangible, as three tankers carrying Saudi crude to China and India reportedly made U-turns in the Bab el-Mandeb waterway on Tuesday to avoid the area.

Asian Refining Rebound in Doubt

Asian refiners were poised to lead a global increase in fuel production this quarter. The International Energy Agency (IEA) had forecast on July 10 that global refinery runs would rise to 81.6 million bpd in the third quarter. However, the prospect of shipment delays from the Middle East now casts doubt on these projections.

Consultancy Wood Mackenzie had anticipated Asian refinery throughput would rebound to 30.37 million bpd in August, up from about 28 million bpd in May and June. K.Y. Lin, president of Taiwan’s Formosa Petrochemical Corp (FPCC), said that while the company secured crude for August, the delivery of some cargoes remains uncertain due to the conflict.

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Soaring Margins Amid Supply Constraints

The supply disruptions have sent refiners' profit margins soaring. In Asia, margins for gasoil and jet fuel have jumped to more than $65 a barrel, a sharp increase from around $20 before the conflict. European diesel margins hit a record $66.25 a barrel, while a key U.S. refining profitability benchmark rose to a record of nearly $70 a barrel.

This situation is exacerbated by Russia's ban on diesel exports following Ukrainian drone attacks on its refineries. While U.S. and European refiners are running near maximum capacity to capitalize on high margins, they have little spare capacity to fill the global supply gap. "Margins are set to stay high," said Sparta Commodities analyst Neil Crosby. "Prices need to go up to lower end-user demand."

China's Potential Role

China stands out as the one major refining hub with significant room to increase production, as its refineries ran at just 58% of capacity in June. The country holds large crude stockpiles and is less dependent on immediate imports. However, its output has been constrained by weak domestic demand and fuel export restrictions.

While Beijing eased export quotas for July, its policy for August remains unclear. Wood Mackenzie forecasts China’s throughput could climb to 13.96 million bpd in August from 12.63 million bpd in June, which could help alleviate some of the global fuel market tightness if export channels are opened.