The outlook for the Middle East war remains grim, the U.S. just threatened Iran with the “toughest sanctions in history,” and the world is running out of stored fuels. To make matters worse, refining capacity is down considerably, and even if the outlook for the war suddenly changed and the U.S. and Iran made peace, the fuel squeeze will last for months—and so will its adverse effects on the global economy.
Watching crude oil prices, one would think everything is under control. Both Brent crude and West Texas Intermediate are below $100 per barrel, even if they are both up by around $20 per barrel from pre-war levels. Still, the price rise in crude oil is much more moderate than the inflation in fuel prices. Diesel in Europe, for instance, is up by 70% from pre-war levels, as reported by Reuters’ Ron Bousso this week.
A separate Reuters report showed that diesel now costs more in Europe than jet fuel. This is the first time in over a year that the price difference between the two fuels is in favor of diesel, the publication noted, citing data from LSEG. The diesel crack spread in the United States hit triple digits earlier this week, for the first time ever. The premium over crude prices jumped to as high as $102 per barrel on Monday, before easing slightly to about $100 a barrel on Tuesday.
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Refinery margins are running at record highs across the world as the energy crisis unfolds. The first aspect of this crisis is the tighter supply of crude from the Middle East, which should be obvious enough since the media has been covering the topic on a daily basis for over six months. Yet there has also been refinery damage in the Middle East. In fact, per the International Energy Agency, as much as a fifth of that refining capacity, totaling some 9.6 million barrels daily, has been knocked out by hostilities.
In addition to the Middle East crisis, the relentless drone strike barrage by Ukrainian forces against Russian refineries has led to fuel shortages and a ban on exports to secure more domestic supply. As a result, the world’s second-largest diesel exporter is closed for business, leaving the market for the “workhorse” fuel of the economy even tighter—and there are not enough refineries outside the Middle East and Russia to handle demand.
That demand, however, remains substantial, so the United States, which has been insulated from the more direct effects of the two hot wars, has been ramping up fuel exports, with those hitting an all-time weekly average high of 1.9 million barrels daily. However, these exports have been driven this high not only by higher-than-usual refinery utilization rates. These rates have been supplemented by inventory draws, and that may become a problem.
