Diesel crack spreads top $100 as Hormuz crude flows lag pre-war

Diesel crack spreads above $100 per barrel show the fuel market's problem is refining capacity, not crude supply, as Hormuz flows recover at just 15 percent of pre-war levels.

"It's not necessarily a crude issue or a crude crisis. We're not in a crude crisis, we're in a refining crisis," said Aaron Decker, chief executive officer at Multi-Service Fuel Card.

Ultra-low distillate inventories have fallen to levels not seen since the early 2000s, and even the late 1990s, Decker said. U.S. distillate stocks fell 2.2 million barrels last week, according to EIA data. Meanwhile, Kpler data shows crude exports through the Strait of Hormuz averaged just 2.3 million barrels per day in August, down from 4.49 million bpd in July and 15.82 million bpd in the three months before the U.S.-Israeli attack on Iran on February 28.

The combination of a refining crunch and slow Hormuz recovery keeps diesel prices above $5 per gallon and crude benchmarks technically vulnerable. WTI and Brent remain under pressure as traders weigh the risk of prolonged supply disruption against hopes for diplomatic progress. If Hormuz flows do not recover meaningfully by September, when cargoes loaded in August begin arriving at Asian ports, fuel prices could push higher into the winter heating season.

Crack Spreads Above $100 Signal Refining Crisis

On-road diesel prices hit the high $5.60s this week, with crack spreads exceeding $100 per barrel — well beyond the typical $15-$25 range. Ukrainian drone strikes have taken out Russian refineries that previously helped backfill global shortfalls, while U.S. Gulf Coast diesel exports remain elevated as domestic refiners supply shortage-stricken markets overseas, tightening American supply and consuming domestic refining capacity.

Decker said he does not anticipate the situation improving in the near term, noting the EIA has adjusted its forecast downward from the start of the year. "I would imagine we're north of $5 for the foreseeable future," he said. Hurricane season adds another wildcard, with El Niño activity potentially threatening Gulf Coast refining infrastructure in the third and fourth quarters.

Asia's Crude Imports Stay 14 Percent Below Pre-War Levels

Asia's crude imports in August are expected to reach 23.12 million barrels per day, slightly down from July's 23.36 million bpd and nearly 4 million bpd, or 14 percent, below the 26.91 million bpd average in the three months to the end of February, according to Kpler. India's August imports are estimated at 4.51 million bpd, the lowest since March, with Middle East arrivals at 1.45 million bpd — just over half the 2.88 million bpd pre-conflict average.

The data challenges claims by U.S. Energy Secretary Chris Wright that flows through the Strait of Hormuz are nearly back to pre-conflict levels. The most Kpler was able to track exiting the strait in any week in August was 4.26 million bpd in the seven days beginning August 3. July and August arrivals were likely boosted by cargoes loaded during the brief ceasefire between the U.S. and Iran from mid-June to early July.

If Wright's estimate of nearly 15 million bpd leaving the Middle East is accurate, much of that volume would only show up in September arrivals, particularly for longer-voyage destinations such as Japan, South Korea, and China. But as yet there is no evidence that Asia's crude imports from the Middle East are close to pre-war levels.

The last time distillate inventories were this tight, in the early 2000s, diesel prices remained elevated for multiple quarters before refining capacity additions caught up with demand. The current situation is compounded by geopolitical risk that shows no sign of abating, keeping the risk premium embedded in crude prices. Oil prices extended losses on Wednesday as hopes for Middle East talks to ease supply woes outweighed the tight diesel picture. Indian equities have already felt the strain — the Nifty fell 2.33 percent and the Sensex declined 2.70 percent last week as rising crude prices, rupee weakness, and FII outflows weighed on sentiment.

This article is for informational purposes only and does not constitute investment advice.