Global Fuel Markets Signal Supply Crunch Despite Calmer Oil Prices

Global gasoline and diesel markets are signaling a significant fuel supply crunch, even as crude oil prices remain relatively subdued. This suggests that the energy shock stemming from the Iran war may be far from over, despite improved flows through the Strait of Hormuz.

Energy prices initially surged after the US-Israeli war on Iran led to the effective closure of the Strait of Hormuz, which historically carried about a fifth of global oil supplies. While crude prices fell sharply following last month’s ceasefire deal, and have risen only modestly with renewed fighting, fuel prices have remained elevated. This indicates that inflationary pressures on industry and consumers are likely to continue, a concern for central banks.

Pressure on fuel markets intensified this week after Russia implemented a ban on diesel exports. This ban was enacted as Ukrainian attacks damaged its refining infrastructure, raising the risk of domestic shortages. The gap between fuel and crude prices, which serves as a proxy for refinery profit margins, has widened sharply. This occurred even as refiners in Europe and the US are struggling to absorb a glut of crude oil from emergency stock releases and from the Middle East during the US-Iran ceasefire.

According to Sparta Commodities analyst Neil Crosby, there is insufficient global refining capacity to manage the current situation, and high fuel prices could soon curb consumer demand. European diesel refining margins reached a record high of over $60 a barrel after Russia’s export ban. Similarly, European gasoline traded at a premium of approximately $41 a barrel to crude this week, marking its highest level since summer 2022 during the peak disruption from the Russia-Ukraine war.