Fuel Markets Signal Supply Crunch Despite Stable Crude Oil Prices
By Robert Harvey and Ahmad Ghaddar
Fuel Market Dynamics and Global Supply Concerns
LONDON, July 9 (Reuters) - Gasoline and diesel markets are signalling a fuel supply crunch despite relatively subdued crude oil prices, suggesting the energy shock from the Iran war may be far from over.
Impact of Geopolitical Events on Energy Prices
Energy prices surged after the U.S.-Israeli war on Iran led to the effective closure of the Strait of Hormuz, which carried about a fifth of global oil supplies before the conflict.
But while crude prices fell sharply after last month's ceasefire deal — and have risen relatively modestly on bursts of renewed fighting since — fuel prices have remained elevated.
Inflationary Pressures and Central Bank Concerns
That suggests the inflationary pressures weighing on industry and consumers, and worrying central banks, is set to continue, even if flows through the Strait of Hormuz have improved.
Refining Capacity and Market Margins
Pressure on fuel markets intensified this week after Russia banned diesel exports as Ukrainian attacks battered its refining infrastructure and raised the risk of domestic shortages.
The gap between fuel and crude prices — a proxy for refinery profit margins — has widened sharply even as refiners in Europe and the U.S. struggle to absorb a glut of crude oil from emergency stock releases and from the Middle East during the U.S.-Iran ceasefire.
Global Refining Constraints
"There's just not enough refining capacity left globally to deal with all this," Sparta Commodities analyst Neil Crosby said, adding high fuel prices could soon curb consumer demand.
Record High Margins in Europe and the U.S.
European diesel refining margins hit a record high of over $60 a barrel on Wednesday, after Russia announced the diesel export ban. European gasoline traded at a premium of about $41 a barrel to crude this week, its highest since summer 2022 during the peak disruption from the Russia-Ukraine war.
In the U.S., the prompt Nymex 3-2-1 crack spread contract, a proxy for refinery profitability, hit a record high of $64.58 a barrel on July 8.
Russian Diesel Exports and Global Supply Shifts
Declining Russian Diesel and Gasoil Exports
RUSSIAN DIESEL EXPORTS ALREADY DOWN
Russian diesel and gasoil exports were already declining before the latest Ukrainian attacks, falling to a record low of about 400,000 barrels per day, according to Kpler data, and dropping to less than half that level so far in July.
Asian Market Reactions
Asian diesel margins have risen to around a one-month high as traders anticipate tighter supplies in Western markets, even though Asia remains relatively well supplied.
Shifts in Global Trade Flows
Natalia Losada of Energy Aspects said Russia's export ban would force major buyers including Brazil, Turkey and countries in North and West Africa to seek replacement cargoes from the U.S., the Middle East and India, potentially leaving Europe competing for fewer available supplies.
A diesel supply crunch would come at an awkward time for farmers across the Northern Hemisphere, who face higher fuel bills ahead of the autumn harvest season.
Low Inventory Levels and Market Vulnerabilities
LOW INVENTORY LEVELS
Gasoline Margins and Seasonal Demand
Gasoline profit margins have also climbed to fresh highs after showing signs of tightness heading into the Northern Hemisphere's peak summer driving season.
U.S. gasoline stocks were at their lowest for early July since 2021 in the week to July 3, according to Energy Information Administration data.
Asian Inventories and Price Support
In Asia, low inventories have helped support prices despite expectations of higher Chinese fuel exports.
OECD Inventory Trends and Global Risks
Overall OECD oil product inventories remain below their 2015-2019 average despite recovering from spring lows, highlighting limited buffers in global fuel markets and leaving them vulnerable to further supply disruptions.
(Reporting by Ahmad Ghaddar, Robert Harvey, Trixie Yapp and Mohi Narayan. Editing by Mark Potter)
