Beyond the Strait of Hormuz: Refining capacity and product-market vulnerability

The recent disruption in the Middle East, including the closure and uneven reopening of the Strait of Hormuz, has exposed a shift in the global energy system’s principal vulnerability. Initial concern focused on whether enough crude oil could reach the market. Yet crude flows have recovered faster than supplies of gasoline, diesel, jet fuel and other products. Strategic petroleum reserve releases, softer Chinese demand and alternative export routes have helped cushion the crude market, but they cannot substitute for operational refineries. The central constraint is therefore no longer simply the availability of crude; it is the capacity to process the right grades of crude into usable fuels and deliver them to consumers. That distinction defines the current global market imbalance.

Kpler’s analysis supports this distinction between crude availability and product supply. The company expects Middle Eastern refined-product exports to require another three to four months to recover as refineries return to stable operating rates and rebuild export flows. It also notes that product inventories in the United States, Singapore, Fujairah and the Amsterdam-Rotterdam-Antwerp hub remain low, leaving the market with limited protection against additional outages. In Kpler’s base case, global refinery runs rise from about 81.5 million barrels per day (mb/d) in the third quarter to 84.5 mb/d in the fourth, but transportation-fuel balances remain in deficit through much of the second half of 2026.

Refining as the Binding Constraint

Crude markets have shown greater resilience than product markets. According to the International Energy Agency (IEA), global oil supply rebounded by 4.1 mb/d in June as transit through Hormuz partially resumed. Increased Gulf exports helped North Sea Dated crude fall to about $68 per barrel in June, although renewed hostilities later lifted it to around $77. Government stocks also provided temporary support: the IEA estimates that 44 million barrels of the June decline in OECD inventories came from emergency reserve releases. These measures improved immediate crude availability, but they did not restore damaged processing units or restart export refineries.

Product-market indicators tell a different story. The IEA reports that refined-product cracks and refining margins reached four-year highs in early July even as crude prices declined. Global refinery runs increased by 1.5 mb/d in June but remained 6 mb/d below the previous year’s level. Middle Eastern export refineries had not fully restarted, Russian throughput remained constrained by attacks, and Asian plants continued to operate at reduced rates. Consequently, Gulf exports of refined products and liquefied petroleum gas remained below half of their pre-war volumes, whereas crude flows had recovered to nearly three-quarters of February levels.

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The widening gap between crude and product markets is also visible in refining margins. In mid-July, the U.S. 3-2-1 crack spread the estimated margin from converting three barrels of crude into two barrels of gasoline and one of diesel rose to a record $69.66 per barrel. U.S. gasoline inventories had fallen to their lowest seasonal level since 2012, while diesel stocks remained historically weak. These conditions reflect a shortage of processing output rather than an absolute lack of crude. They also explain why lower crude benchmarks have not translated into comparable relief for motorists and industrial consumers 

Russia has intensified the constraint. Kpler estimates that Russian refinery runs fell to about 3.8 mb/d in July, their lowest level in more than two decades. Around 4.3 mb/d of capacity was either undergoing downtime or affected by attacks, although the volume considered effectively offline was lower, at approximately 1.5–2 mb/d.

Since August 2025, at least 25 Russian refineries have been affected, including crude-distillation and secondary-processing units needed to produce on-specification transport fuels.

Kpler expects runs to recover modestly to around 4.3 mb/d in August, but continuing attacks and complex repairs create substantial downside risks.

These developments demonstrate why crude supply and refining capacity are not interchangeable. Refineries are configured for crude qualities and product yields; available barrels cannot always replace lost feedstocks without operational adjustments. Maintenance backlogs, damaged conversion units, limited storage and disrupted shipping further slow recovery. A crude surplus can therefore coexist with shortages of diesel, gasoline or jet fuel.

Responses and Trade-Offs

The first response is to restore refinery output in the Gulf and Russia. Higher utilization would increase fuel availability and reduce exceptional margins. Kpler estimates that refiners with operational flexibility, particularly in the United States, India and parts of Asia, could add 700,000–900,000 barrels per day above its base case through higher utilization and optimization. This would provide meaningful relief, but not an immediate solution. Repairs, safety inspections and restarts take time, while pushing plants too hard increases the risk of unplanned outages.

The geopolitical constraint is equally important: Gulf recovery depends on security around Hormuz, while Russian output remains tied to the course of the war in Ukraine.

The second response is to rebuild commercial confidence in Hormuz. Physical reopening is insufficient if shipowners, insurers and traders continue to price in the possibility of renewed attacks. More reliable transit would lower freight and war-risk insurance costs, release delayed cargoes and reconnect Gulf refineries with export markets. The trade-off is that confidence may require continued naval protection and political arrangements among regional and external powers. Such measures can reduce immediate disruption but cannot remove the strategic vulnerability created by concentrating large volumes of crude and products in one maritime chokepoint. Moreover, crude flows may normalize faster than refinery operations, placing downward pressure on crude prices while product premiums remain elevated.

The third response is to encourage greater refined-product exports from producers with spare operational capacity. Higher exports from the United States and Atlantic Basin, increased output from flexible Indian and Asian refineries, and less restrictive Chinese export policies could ease regional shortages. However, the economic and political costs are significant. Exporting more fuel can tighten domestic inventories and raise local prices, especially during peak demand. Governments may therefore prioritize domestic security through quotas or restrictions, even when exports would improve the global balance. This tension between national affordability and international market stability limits the speed and scale of the response.

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Rebalancing Through Weaker Demand

If product supply does not recover quickly, adjustment is more likely to occur through weaker demand than a rapid expansion of refining output. New or repaired capacity cannot enter service as quickly as consumers respond to higher prices. Costlier gasoline discourages driving, expensive jet fuel raises airfares, and elevated diesel prices increase freight, agricultural and manufacturing costs. These effects weaken consumption directly and slow wider economic activity. Reuters similarly concludes that, with roughly 5 mb/d less global refining output than a year earlier, persistent fuel shortages may ultimately require demand destruction to restore balance.

Supply-side relief will nevertheless emerge gradually. Strong margins encourage refiners to maximize throughput, Middle Eastern facilities will restart, and Russian plants may recover part of their lost production. The IEA expects global refinery runs to decline by 2.4 mb/d in 2026 before rebounding by 3.1 mb/d in 2027. Until then, emergency reserve releases and inventory draws can bridge temporary gaps but cannot create sustainable product supply. If shortages persist, price-sensitive emerging economies will bear the greatest adjustment through reduced mobility, industrial use and consumption.

Conclusion

The Hormuz disruption has shown that energy security depends not only on producing and transporting crude oil but also on converting it into the fuels the economy uses. Crude flows and prices can normalize while gasoline, diesel and jet fuel remain scarce because damaged refineries, low inventories and disrupted export networks recover more slowly. Restoring refinery output, securing Hormuz and increasing product exports can ease the pressure, but each option involves operational delays, domestic economic costs or geopolitical dependencies.

Unless refined-product supply improves more quickly, high margins and consumer prices will persist, and the market will rebalance mainly through weaker demand. Refining capacity has therefore become the immediate chokepoint linking geopolitical disruption to inflation, economic growth and energy security.

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The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.