Confrontation between the U.S. and Iran has intensified strains on oil shipments from the Gulf, casting doubt over Asian refiners' plans to lift runs in August and threatening to keep global product inventories tight for longer. The renewed exchanges have again curbed crude flows through the Strait of Hormuz - a route through which, before the conflict, a fifth of the world's oil moved - while new threats from Yemen's Iran-aligned Houthi forces to disrupt Saudi Arabian shipments via the Red Sea raise the prospect of further shipping detours and delays.
Energy market participants say the combined effects of reduced Gulf shipments, potential Red Sea interruptions and a Russian ban on diesel exports are likely to sustain pressure on fuel supplies worldwide. Analysts warn those constraints could extend the period of elevated fuel prices, as refiners in the U.S. and Europe are already operating at or near peak utilisation and have limited ability to raise product output further.
Shipping disruptions and redirected cargoes
Research firm Energy Aspects estimates more than 3 million barrels per day of Saudi crude destined for Asia via the Bab el-Mandeb waterway could be forced onto much longer routes if the Houthi threats materialise. The redirection would substantially lengthen voyage times for cargoes that otherwise would have taken the shorter passage toward the Suez Canal.
Evidence of altered shipping plans appeared on Tuesday when three tankers loaded with Saudi crude for China and India executed U-turns and headed for the Suez Canal rather than continuing through Bab el-Mandeb. That kind of rerouting increases delivery times to Asian refineries and raises the risk that cargoes lined up for August arrival may not reach processors when expected.
Asian refiners face uncertain crude arrivals
Processors across Asia who had arranged crude supply for August are now preparing for slower deliveries from the Middle East, even as U.S. and European plants run near capacity. Asian refiners had been counted on to lead a recovery in global fuel production this quarter, but the combined disruptions threaten that rebound.
Taiwan's Formosa Petrochemical Corp (FPCC), a significant exporter, had planned to increase throughput to 480,000 barrels per day in August - nearly 90% of its capacity, President K.Y. Lin said. While FPCC believes it has secured crude supplies for August arrival, Lin cautioned that the timing and delivery of some cargoes remain uncertain because of the renewed conflict in the Middle East.
"There should still be a trickle in crude exports from the Strait of Hormuz, but such volumes still cannot be compared with pre-war levels," Lin said.
An unnamed Chinese refining executive echoed expectations of delays for July-August cargo loadings, saying such slippage will complicate efforts to raise output. The executive declined to be named because he was not authorised to speak to media.
Refinery margins surge amid limited spare capacity
High product prices have pushed refiner margins to extraordinary levels. U.S. and European refiners have seen profits climb to record highs, while Asian margins reached two-month peaks. Sparta Commodities analyst Neil Crosby summed up the market dynamic, saying margins look set to remain elevated because there simply is not sufficient refining capacity to manage both a partial closure of the Strait of Hormuz and Russian export bans.
"Margins are set to stay high. There is simply not enough capacity in the world to deal with the double whammy of Hormuz closure and Russian export bans. Prices need to go up to lower end-user demand," Crosby said.
For gasoil and jet fuel specifically, Asian refiners' margins have jumped to more than $65 a barrel, a sharp rise from just above $20 before the conflict began. European diesel profits hit a record of $66.25 a barrel after Russia moved to ban diesel exports. In the U.S., the crude-to-fuel products spread that is commonly used to gauge refiner profitability climbed to nearly $70 a barrel late last week, also a record.
Recovery prospects and throughput forecasts
Before the most recent escalation, global refiners were expected to average 81.6 million barrels per day in the third quarter, according to the International Energy Agency's July 10 estimate - an increase of more than 4% from the second quarter but still about 4% below year-earlier levels. That forecast relied on a recovery led by Asia.
Wood Mackenzie, a consultancy, had forecast Asian throughput to reach 30.37 million barrels per day in August, up from about 28 million bpd in May and June. However, that recovery could stall if shipments through the Strait of Hormuz diminish further and if Saudi Arabian cargoes bound for Asia are rerouted around the west coast of Africa, potentially adding an extra month to delivery times.
Wood Mackenzie also projected China’s throughput to climb to 13.96 million bpd in August, from 12.63 million bpd in June. That uptick hinges in part on whether Beijing's temporary easing of fuel export restrictions in July will be extended into August and on refiners' willingness to raise runs amid uncertain crude arrivals.
China's capacity to fill the gap
China stands out among Asian countries for its ability to rapidly expand refinery output because its runs slumped to just 58% of capacity in June, leaving more headroom than other regional refiners. In contrast, refiners across Asia excluding China were running at about 93% to 95% of pre-war levels, according to analyst Sumit Ritolia at Kpler.
Chinese refiners are less dependent on imported crude than some regional peers because they hold a substantial stockpile. Many had kept runs subdued because of weak domestic demand and existing export curbs. Beijing eased those export restrictions for July, but it was not clear whether the policy would be extended into August.
Independent Chinese refiners that bought discounted Middle Eastern crude are among those expected to raise output if they can secure timely deliveries. Shenghong Petrochemical's 320,000-bpd refinery in Jiangsu province, for example, is scheduled to resume operations in mid-August after a major overhaul.
U.S. and European refiners near maximum utilisation
Refiners in the U.S. and Europe are expected to push third-quarter output toward the maximum possible to capitalise on record margins, but analysts say there is little spare capacity left to do more. Energy Aspects analyst Raul Calzada noted refiners are operating at record utilisation rates, while Industrial Info Resources' refinery tracker shows some plants have marginally increased rates beyond normal operating levels where feasible.
"In the past couple of months, we have witnessed several refiners marginally increase rates beyond their normal operating where possible," said Trey Hamblet, an analyst at Industrial Info Resources.
Despite very low gasoline stocks at the U.S. Gulf Coast, Hamblet explained refiners are prioritising diesel production because diesel margins are most attractive. "They need to make as much diesel as possible because that’s where the margin is," he said. "So we are locked in this situation where all products get tight."
The combined effect of disrupted shipping lanes, export bans and already-high utilisation across major refining regions raises substantial uncertainty about whether global fuel production can recover as expected. Much depends on the pace and scale of China’s potential increase in runs, the duration of shipping disruptions in the Strait of Hormuz and Bab el-Mandeb, and the continued impact of Russian diesel export restrictions on European product availability.