Key Takeaways:
The escalating U.S.-Iran war is derailing Asian refiners' plans to boost output, threatening to keep global fuel markets tight through the third quarter.
Asian oil refiners' plans to ramp up output in August face disruption from the escalating U.S.-Iran war, threatening to keep global fuel stocks tight and prices elevated unless China fills the gap.
"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," said Neil Crosby, analyst at Sparta Commodities.
Asian refiners had been expected to lead a global recovery in fuel production this quarter, with consultancy Wood Mackenzie forecasting throughput to reach 30.37 million barrels per day in August, rebounding from about 28 million bpd in May and June. But attacks between the U.S. and Iran have again throttled Gulf crude exports through the Strait of Hormuz, where a fifth of the world's oil previously passed before the war. Now, Yemen's Iran-aligned Houthis have threatened to block Saudi Arabian exports from the Red Sea, which could force more than 3 million bpd of Saudi crude bound for Asia to take much longer routes, according to research firm Energy Aspects.
The double supply shock coincides with Russia's ban on diesel exports after Ukrainian drone attacks on its refineries, deepening a global supply crunch. Asian refiners' margins for gasoil and jet fuel have jumped to more than $65 a barrel from just above $20 before the war, while European diesel margins hit a record $66.25 a barrel and U.S. refiner profitability surged to close to $70 a barrel.
Refineries in Asia excluding China are running at 93 percent to 95 percent of pre-war levels, said Sumit Ritolia, analyst at Kpler. By contrast, China's refinery runs slumped to just 58 percent of capacity in June, giving it the most room to ramp up output. It is also less dependent on imported crude, with large stockpiles it can tap.
Beijing eased fuel export restrictions for July, but it remains unclear whether the policy will extend into August. Wood Mackenzie sees China's throughput climbing to 13.96 million bpd in August, up from 12.63 million bpd in June. China's independent refiners, which have bought discounted Middle Eastern crude, are expected to raise output, trade sources said. Shenghong Petrochemical's 320,000-bpd refinery in Jiangsu province is expected to resume operations in mid-August after a major overhaul.
Taiwan's Formosa Petrochemical Corp, a key exporter, had planned to raise throughput to 480,000 bpd, or nearly 90 percent of capacity, in August. "While FPCC has managed to secure crude supplies for August arrival, the delivery and arrival of some of these cargoes remain uncertain for now, given the resumption of Middle East conflict," President K.Y. Lin said.
U.S. and European refiners are expected to maximize third-quarter output to capitalize on record margins but have little room to ramp up further, analysts said. In the U.S., the crude-to-fuel products spread most widely used as a benchmark for refiner profitability rose to a record of close to $70 a barrel late last week.
Energy Aspects analyst Raul Calzada said refiners are running at record utilization rates. For the third quarter, U.S. Gulf Coast runs are forecast to rise by 200,000 bpd, up 2.1 percent from a year earlier. Although gasoline stocks are "super low" at the U.S. Gulf Coast, refiners are not incentivized to maximize gasoline production, said Trey Hamblet, analyst at refinery tracker Industrial Info Resources. "They need to make as much diesel as possible because that's where the margin is."
The International Energy Agency said on July 10 that global refiners had been expected to run 81.6 million bpd in the third quarter, up more than 4 percent from the second quarter but still 4 percent lower than a year earlier. That recovery now hinges on whether China can compensate for the supply shortfall — and whether the Houthi threat to Red Sea shipping escalates into a full blockade that would shut both of the Middle East's major oil export routes simultaneously.
This article is for informational purposes only and does not constitute investment advice.
