Low inventories and surging geopolitical risks keep fuel prices elevated

The escalating US-Iran war threatens Asian oil refiners’ plans to ramp up output in August, which could keep global fuel stocks tight and bolster prices for longer unless China ​fills the gap. Asian refiners, counting on steadier oil supply, had been expected to lead a recovery in global fuel production this quarter, but attacks between the US 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 barrels per day of Saudi crude that were going to Asia through the Bab el-Mandeb waterway to take much longer routes, according to research firm Energy Aspects. On Tuesday, three tankers carrying Saudi crude bound for China and India through Bab el-Mandeb made U-turns, heading towards the Suez Canal. As a result, Asian refiners who had ​lined up crude supply for August are now bracing for delays in shipments from the Middle East, while processors in the US and Europe are already running near capacity. At the same time, Russia has banned diesel ​exports due to Ukrainian drone attacks on its refineries, which means global oil products supply will remain tight, bolstering gasoline, diesel and jet fuel prices. Lofty fuel prices have propelled ⁠refiners’ profit margins to record highs in the US and Europe and to two-month highs in Asia. “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,” said Sparta Commodities’ analyst Neil Crosby. For gasoil and jet fuel, Asian refiners’ margins have jumped to more than $65 a barrel, up from just above $20 before the ​war. RECOVERY NOW UNCERTAIN Globally, refiners had been expected to run 81.6 million barrels per day in the third quarter, the International Energy Agency said on July 10, up more than 4 per cent from the second quarter, led by a recovery in Asia, but still 4 per cent lower than a year earlier. In Asia, consultancy Wood Mackenzie expected throughput to reach 30.37 million bpd in August, rebounding from about 28 million bpd in May and June. However, that recovery could stall if shipments through the Strait of Hormuz decline further and Saudi exports take an extra month ​to reach Asia, going around the west coast of Africa. Taiwan’s Formosa Petrochemical Corp (FPCC), a key exporter, had planned to raise throughput to 480,000 bpd, or nearly 90 per cent of capacity, in August, President K.Y. Lin said. “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,” Lin said. “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.” A Chinese refining executive said he expects some delays for July-August loading cargoes which will make it hard to raise output. The executive declined to be named as he is not authorised to speak to media. CHINA COULD HELP FILL FUEL SUPPLY GAP Refineries in Asia excluding China are running at 93 per cent to 95 per cent of pre-war levels, said Kpler analyst Sumit Ritolia. By contrast, China’s refinery runs slumped to just 58 per cent of capacity in June. It has the most room to ramp up output and is also less dependent than other countries on imported crude, as it has a large stockpile it can tap. Its refiners have kept a lid on output due to weak domestic demand and fuel export restrictions. Beijing eased 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, for example, is expected to resume operations in mid-August after a major overhaul. US, EUROPE AT FULL TILT US and European refiners are expected to ​maximise third quarter output to capitalise on record margins but have little room to ramp up, analysts said. European diesel profit margins hit a record of $66.25 a barrel after Russia ​banned diesel exports. In the US, the ⁠crude-to-fuel products spread most widely used as the benchmark for US 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 utilisation rates. For the third quarter, US Gulf Coast runs are forecast to rise by 200,000 bpd, up 2.1 per cent from a year earlier. “In the past couple of months, we have witnessed several refiners marginally increase rates beyond their normal operating where possible,” said Trey Hamblet, analyst at refinery tracker Industrial ⁠Info Resources. Although gasoline stocks ​are “super low” at the US Gulf Coast, he said refiners are not incentivised to maximise production of gasoline. “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.”