Warning signs are flashing in the global oil refinery industry. As conflicts in the Middle East, and Russia spread through the energy markets, the supply chain of products that fuel global economies is being put under increasing stress.

Benchmark crude oil prices have fallen sharply since the peak of $118 per barrel during the Iran War. They are now hovering at $85, which suggests that many investors think the threat of a global energy crisis is over. The system for converting crude oil into fuels has not recovered from the disruptions caused by conflicts in Russia and Middle East. The inventories of gasoline and diesel are at multi-year lows. Refining margins are at record highs. And refinery throughput is severely restricted in key producing regions.

The stress that they should monitor is because the household and industrial sectors consume refined products instead of crude.

WARTIME CASUALTIES

Refineries are a tempting target. Saudi Arabia, Bahrain Kuwait, and the United Arab Emirates have major refineries that are either partially or completely offline. This is because the Strait of Hormuz was closed on 28 February due to the Iran conflict. China has reduced its refinery runs dramatically to compensate for the huge drop in imports that occurred during the Iran Conflict. Refineries in Asia have also had to cut back on operations due to a lack of crude oil. The Russian refining industry has also been 'hit by sustained drone attacks from Ukraine,' causing fuel shortages at home. This forced Moscow to reduce diesel exports to control soaring prices.

According to the International Energy Agency, these disruptions combined removed approximately 5 million barrels of daily global refining production in?the second half of 2012 compared to a year ago, with refinery operations averaging 78 million bpd. Hormuz was temporarily reopened following the U.S./Iran ceasefire of June 17, which eased pressure for a short time. Even though Gulf producers have rushed crude exports across the waterway, flows of refined products remain weak. Kpler data shows that the region only exported 1 million bpd in oil products during June. This is a quarter less than pre-war levels. The renewed disruption of traffic through Hormuz - due to the escalating hostilities between the U.S.

Both buffers and time are running out.

U.S. Running out of STEAM In the first half of this year the U.S. emerged as the world's last-resort refinery, increasing exports of crude oil, gasoline, aviation fuel, and diesel to compensate for disruptions in other parts of the world.

It is running out of steam.

Since the beginning of the Iran War, U.S. crude stocks, including those commercial and in the emergency reserve of the government, have fallen to their lowest levels since 1984. The gasoline stocks are at the lowest seasonal level they have been since 2012. Diesel inventories, on the other hand, only recently recovered their lowest levels for more than 20 years. As refiners try to meet the rising domestic demand, U.S. crude exports are also declining. Last week, weekly exports dropped to 10.7 millions bpd, the lowest since March. They had reached a record of 14.2 million in April.

Washington's ability?to supply the rest of the world is becoming increasingly limited. With domestic stocks under pressure and the summer fuel demand at a seasonal high, Washington looks to be increasingly restricted.

CRACKING CRACKS

Profits from the refining industry are perhaps the most obvious sign of trouble. The benchmark U.S. crack spread or 3-2-1 refining ratio, which is the benchmark in the United States, has recently risen to a record high of nearly $70 per barrel. Refining margins in Northwest Europe reached seasonal highs near $30 per barrel.

The diesel markets seem to be particularly tight. The European diesel margins reached a new record of $65 per barrel, while U.S. gasoline margins are nearing the levels of the 2022 energy shock after Russia invaded Ukraine.

The markets do not pay such high premiums to refiners unless there is a competition between consumers for limited fuel supplies.

TRUMP CARD?MIGHT NOT WORK As Iran crisis enters fifth month, traders are increasingly convinced that U.S. president Donald Trump will almost do anything to prevent a politically damaging rise in U.S. Fuel Prices. The bright flashing signs that come out of the refinery system suggest that the U.S. President may struggle to prevent one.

It is unlikely that global refinery production will recover quickly. Due to conflicts, disruptions in supply or export restrictions, several major refinery hubs are still impaired. This is just as the summer demand for jet fuel and road fuels reaches its peak. Diesel stocks are typically built up during the summer months before winter. It will take several months or even years for the Russian refinery to recover from any further Ukrainian strikes. This is a risk few are willing accept. Middle East refineries also need months to ramp up their operations after the flow through Hormuz is normalised - whenever that may be.

Demand destruction would be the only market lever left as inventories dry up, and this could reduce economic activity in the world.

The energy markets handled the chaos of the first half 2026 very well. However, with the world's fuel reserves now worryingly low, the global economic system is at risk.

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(source: Reuters)