Escalation of the Iran-Iraq conflict threatens Asian refiners’ August output-boost plans, as global fuel supplies run short

BlockBeats, July 25: Reuters recently reported that military tensions between the United States and Iran have escalated again, threatening the long-fragile recovery of global refining capacity. Asian refiners are the first to be hit. Asian refiners, which had been expected to drive a rebound in global fuel production this quarter, are now stuck after transport through the Strait of Hormuz has been obstructed again.

Yemen’s Houthi forces have threatened to block Saudi crude oil exports via the Red Sea. According to estimates by research firm Energy Aspects, this could force more than 3 million barrels per day of Saudi crude that was originally shipped to Asia via the Bab-el-Mandeb Strait to be rerouted over longer routes.

On Tuesday this week, three Saudi oil tankers originally bound for China and India turned around and headed toward the Suez Canal. As a result, Asian refiners that had already arranged crude supply for August are facing delivery delays for Middle East cargoes. At the same time, U.S. and European refineries are operating at close to full capacity, leaving almost no room to increase output.

Lin Khang-chang, president of Formosa Petrochemical (FPCC), said the company originally planned to raise operating rates to 480k barrels per day in August (nearly 90% capacity). While it has locked in crude arrivals for August, the renewed Middle East conflict has still created uncertainty around the delivery and arrival times of some cargoes. A Chinese refining executive who asked not to be named also said it is expected that August shipments will be delayed in July and August, making it difficult to increase production.

Another heavy pressure amid tight supply comes from Russia. Its refining facilities have continued to be hit by Ukrainian drone attacks, leading to domestic fuel shortages. Moscow has been forced to limit diesel exports to curb a surge in domestic prices.

With multiple factors stacking up, global refining margins have been pushed to high levels: U.S. and European refining margins have reached historical highs, and Asian refining margins have also hit a two-month high. Sparta Commodities analyst Neil Crosby said global capacity is insufficient to handle the double shock of a closure of the Strait of Hormuz and Russia’s export ban at the same time, so prices must rise to suppress terminal demand. For diesel and jet fuel, Asian refiners’ profit margins have jumped to more than $65 per barrel, while that figure before the war was only a little above $20.