Global Refining Crisis Deepens as Middle East Conflicts Disrupt Fuel Supply Chains

The Refining Bottleneck

Benchmark crude oil prices have fallen to around $85 per barrel from February's peak of $118, but the retreat masks a deeper crisis unfolding in the refining sector. Global refinery output has contracted by roughly 5 million barrels per day in the second quarter compared to the previous year, with total throughput averaging 78 million barrels daily, data from the International Energy Agency shows.

The decline stems from cascading disruptions across key producing regions. Major refineries in Saudi Arabia, Bahrain, Kuwait and the United Arab Emirates remain partially or fully offline following the closure of the Strait of Hormuz on February 28. The waterway, which handles roughly one-fifth of global oil trade, was shuttered after the outbreak of conflict between Iran and regional actors.

China has sharply curtailed refinery operations to compensate for the steep drop in crude imports during the conflict. Across Asia, refiners have been forced to reduce runs due to constrained feedstock availability. Meanwhile, sustained Ukrainian drone strikes on Russian refining infrastructure have triggered domestic fuel shortages, prompting Moscow to restrict diesel exports to contain soaring local prices.

Temporary Relief Proves Fleeting

The United States-Iran ceasefire agreement on June 17 briefly reopened Hormuz, allowing Gulf producers to resume crude shipments. Yet refined product flows remained substantially weaker than pre-conflict levels. Tracking data from Kpler indicates the region exported approximately 4 million barrels per day of crude in June, but only 1 million barrels daily of refined products, representing one-quarter of normal volumes.

The respite proved short-lived. Renewed hostilities between Washington and Tehran have once again blocked traffic through the strait, eliminating prospects for a near-term recovery in Asian or Middle Eastern refining activity. The pattern has left fuel inventories dangerously thin across multiple markets.

Gasoline stocks in the United States sit at their lowest seasonal level since 2012, while diesel inventories only recently climbed back from two-decade lows. Combined US crude inventories, including commercial stocks and the Strategic Petroleum Reserve, have dropped to their thinnest level since 1984.

Record Margins Signal Market Stress

Refining profit margins have surged to unprecedented levels, a clear indicator of supply tightness. The benchmark US 3-2-1 crack spread recently hit nearly $70 per barrel, an all-time high. In Northwest Europe, refining margins reached seasonal records near $30 per barrel.

Diesel markets show particularly acute strain. European diesel margins have jumped to a record of around $65 per barrel, while US gasoline margins hover near the peaks reached during the 2022 energy shock following Russia's invasion of Ukraine. Such elevated margins typically emerge only when consumers are competing for scarce supplies.

The United States initially emerged as the refinery of last resort in the first half of 2026, ramping up exports of crude, gasoline, diesel and jet fuel to offset disruptions elsewhere. But that capacity is now constrained. US crude and product exports have started retreating from the record 14.2 million barrels per day reached in April, falling to 10.7 million barrels daily last week, the weakest since March. With domestic inventories under pressure and summer driving season pushing demand to seasonal peaks, Washington's ability to supply global markets is increasingly limited.

Asia Faces Prolonged Constraints

The outlook for rapid recovery remains dim. Several major refining hubs remain impaired due to ongoing conflict, infrastructure damage or export restrictions, precisely as summer demand for gasoline and jet fuel reaches its annual peak. Diesel stocks, which typically build during summer months in preparation for winter heating demand, are failing to accumulate at normal rates.

Russian refining capacity will likely require months, if not years, to recover, assuming no further Ukrainian strikes. Middle Eastern refineries will similarly need extended periods to ramp up operations once Hormuz traffic normalizes, a timeline that remains uncertain given the volatile security environment.

The situation presents particular risks for Asian economies heavily dependent on imported refined products. With regional refining capacity offline and US export volumes constrained, alternative supply sources remain scarce. Indonesia, which imports substantial volumes of gasoline and diesel to meet domestic demand, faces potential fuel shortages if the supply crunch persists.

Demand Destruction Looms

As inventories approach critical levels, the only remaining market mechanism to balance supply and demand would be demand destruction through higher prices, which could curtail economic activity globally. The prospect is particularly concerning for emerging Asian economies still recovering from pandemic-era disruptions.

Energy markets navigated the chaotic first half of 2026 with relative stability, but the erosion of fuel stockpiles has left the global economy exposed to sudden supply shocks. Summer typically provides a buffer period for refiners to rebuild inventories ahead of winter demand, but that window is closing rapidly with little sign of meaningful supply recovery on the horizon.