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Fuel markets show record tightness on Hormuz escalation
Tighter global fuel supplies threaten more pain at the pump for consumers
Storage tanks at a pipeline facility in Avenel, N.J. (Mark Kauzlarich/Bloomberg)
Key Takeaways:
- Fuel markets in the U.S. and Europe tightened sharply as renewed Middle East conflict and tanker attacks in the Strait of Hormuz raised concerns about fuel supplies.
- Fuel prices have risen faster than crude because Gulf crude disruptions, lower Russian exports and limited refining capacity constrained global supplies.
- The collapse of the U.S.-Iran truce and upcoming refinery maintenance could further strain supplies as refineries prepare seasonal shutdowns and shipping risks persist.
Fuel markets in the U.S. and Europe are flashing record tightness as tensions flare up in the Middle East, threatening more pain for consumers already strained with high prices at the pump.
Tanker attacks in the Strait of Hormuz and the involvement of the Iran-backed Houthis are reviving concerns about flows of fuels from the region, which the West was heavily reliant on prior to the conflict. They coincide with a plunge in Russian exports as Ukraine targets the country’s refineries.
Prices for gasoline, diesel and jet fuel have been spiraling up faster than crude throughout the Iran conflict, stoking inflation and keeping consumers and central banks on edge. Global fuel supplies were already tight before the war, and refiners were forced to cut processing rates when crude from the Persian Gulf stopped flowing, especially in Asia.
Now, the collapse of a U.S.-Iran truce threatens supplies as refineries prepare to take capacity offline for seasonal maintenance. The United Arab Emirates said two of its tankers were struck while transiting Hormuz, following a spate of ship attacks in the waterway since last week.
“If you look at refinery utilization over the last few months, some regions have seen lower utilization, because they didn’t have the crude,” said Jonathan Lamb, an analyst at Wood & Co. “Refiners were not able to add incremental volumes.”
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In Europe, the profit that oil refiners make on diesel reached the highest level since at least 2011 this week. In the U.S., a measure of refining margins known as the 3-2-1 crack, which approximates turning crude into gasoline and diesel, has surged to a record even as refineries run hard.
A heat wave across Europe may also force some plants to reduce crude-processing. Plus, over the last few years, several refineries have closed in the U.S. and Europe.
