Refinery squeeze removes millions of barrels as Iran war tightens fuel

The Iran war, Ukrainian strikes on Russian refineries, and China's fuel export curbs have pulled millions of barrels of refined products off global markets, leaving buyers scrambling for alternative supplies.

The Iran war, Ukrainian attacks on Russian refineries, and China's fuel export restrictions have stripped millions of barrels of refined products from global markets, squeezing refiners and lifting gasoline, diesel, and jet fuel prices. WTI crude pulled back below $76 a barrel this week as markets weighed talks to reopen the Strait of Hormuz, though fading optimism over a U.S.-Iran deal has kept prices elevated.

"Repeated attacks on the Jazan refinery and tight stocks ahead of winter suggest gasoil cracks will remain at seasonally elevated levels," said Warren Patterson, head of commodities strategy at ING.

Crude prices have surged more than 70 percent since the war began in late February, with U.S. gas prices climbing between 30 percent and 50 percent. The Strait of Hormuz closure halted roughly 20 million barrels a day of petroleum liquids, about a fifth of global demand, while Ukrainian drone strikes have knocked out capacity at Russian refineries and Beijing has restricted fuel exports. European natural gas prices have also surged as storage sits below 2021 levels, with the 75 percent winter target at risk.

The squeeze is reshaping the profit landscape. Wood Mackenzie estimates oil company profits could rise to $495 billion this year if crude averages around $90 a barrel, more than double what companies expected at pre-war prices near $60. Most are holding onto the windfall rather than reinvesting in production, according to Tom Ellacott, vice president of corporate research at Wood Mackenzie.

Refining margins widen as supply tightens

The refined-product crunch is hitting hardest where refineries have closed or been damaged. Marathon Petroleum, the second-largest refiner in California, reported $5.1 billion in second-quarter profit, more than four times the same period last year. Chevron, the biggest refiner in the state, earned $12.1 billion, nearly five times the year-earlier quarter and its highest in at least six years. Valero posted $3.7 billion, another fivefold increase.

California, which had the country's highest gas prices before the war, is now hovering above $5.60 a gallon. The state's branded stations charge 31 cents more per gallon on average than unbranded ones, versus a national gap of about 6 cents, according to the California Energy Commission. The price spikes have prompted state legislators to propose suspending California's cleaner-burning fuel blend and giving the attorney general power to prosecute wartime price gouging.

Inflation spillover reaches beyond energy

The supply shock is feeding into broader inflation. Trailing 12-month inflation surged from 2.4 percent in February to a three-year high of 4.2 percent in May, more than double the Federal Reserve's 2 percent target. Core Personal Consumption Expenditures, which strips out volatile food and energy costs, reached 3.4 percent in May, its highest since October 2023, and the Cleveland Fed's August forecast sees it easing only to 3.36 percent.

The disruptions extend well beyond fuel. About a third of the world's fertilizer passes through the Strait of Hormuz, and Qatar supplies more than a third of global refined helium used by chip fabricators. Businesses are rerouting shipping, changing suppliers, and shifting transport modes, costs that are being passed to consumers. The last time core inflation ran this hot, in late 2023, the Fed held rates at a two-decade high for months before easing. If the Federal Open Market Committee is forced to raise rates to stabilize prices, it could end the equity rally that has lifted the S&P 500 and Nasdaq Composite to records, making borrowing costlier for the companies funding the AI infrastructure build-out.

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