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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Yawen Chen
(Reuters Breakingviews) – The oil crisis is becoming a tale of two barrels. Brent crude, at around $88 a barrel, is nearly a third below the $126 it touched at the height of the Iran war. Any peace deal, or a reopening of the Strait of Hormuz, could send it lower still. But prices for the fuels made from it have fallen much less. That leaves consumers with higher costs and refiners with unusually fat margins. Crude supplies could recover faster than refining output. For example, Gulf pipelines can bypass Hormuz for some crude exports, but offer no equivalent escape route for refined fuels. The International Energy Agency (IEA) reckons Middle Eastern processing was 2.9 million barrels per day (bpd) below pre-war levels in the second quarter and will remain 2.2 million bpd lower in the third. Ukrainian attacks have, meanwhile, pushed Russian refining near a two-decade low. Reduced Chinese processing and fuel exports have added to the shortage.
Diesel is where the problem is most acute. The IEA estimates exports from Russia, the Middle East and major Asian suppliers were 1.3 million bpd lower in July than a year earlier. That is roughly a fifth of the seaborne trade on which importers rely. Europe has little buffer: stocks of gasoil, a close proxy for diesel, at the Amsterdam-Rotterdam-Antwerp hub are 24% below their five-year average. Jet fuel stocks there were 39% below average.
Refiners are making the most of the shortage. European diesel’s premium over Brent, a rough gauge of the margin from turning crude into fuel, has almost tripled from around $25 a barrel at the start of the year to more than $70, according to LSEG data. Jet fuel offers some contrast: higher prices can curb discretionary flying. But diesel demand from trucks, farms and factories is harder to cut. Consumers are already feeling the difference: diesel at the pump was roughly a fifth more expensive in July than in February across major European markets, according to IEA data.
Investors have noticed. Shares in Valero Energy, Marathon Petroleum and Phillips 66 have risen by an average of 66% since the Iran war began, compared with just 8% for ExxonMobil, Chevron, Shell, BP and TotalEnergies, according to LSEG data. The divergence makes sense: refiners are benefiting from unusually high processing margins, while oil majors have more exposure to crude prices, which have fallen sharply from their crisis peak.
Some relief is coming. New and expanding plants in Asia, the Middle East and Africa will add processing capacity. But the longer-term capacity outlook was tight even without the current disruption. Morgan Stanley analysts expect refined fuel demand to grow by 2.5 million bpd over the next three years, while net capacity will increase by just 1.2 million bpd. New refineries can take eight to 10 years to build.
An Iran peace deal could take yet another chunk out of crude prices; but it will not rebuild damaged refineries or quickly replenish depleted fuel stocks. That means relief in crude prices may take longer to reach consumers. Valero and its peers can enjoy the wait. Follow Yawen Chen on Bluesky and LinkedIn.
Global refineries processed 5 million bpd less crude in July than a year earlier, according to the IEA.
(Editing by Neil Unmack; Production by Varun H K)
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