Mideast war disrupts Asian refiners’ August output plans

The escalating U.S.-Iran war is jeopardizing Asian oil refiners' plans to raise output in August, a development that could keep global fuel stocks tight and sustain elevated prices unless China deploys its spare refining capacity to fill the gap.

Shipment Disruptions Cloud Recovery

Asian refiners had been expected to lead a recovery in global fuel production this quarter, with consultancy Wood Mackenzie forecasting throughput reaching 30.37 million barrels per day in August, up from about 28 million bpd in May and June. But renewed attacks between the U.S. and Iran have again throttled Gulf crude exports through the Strait of Hormuz, and Yemen's Iran-aligned Houthis have now threatened to block Saudi Arabian exports from the Red Sea, according to Reuters.wkzo+1

On Tuesday, three tankers carrying Saudi crude bound for China and India through the Bab el-Mandeb waterway made U-turns, heading instead towards the Suez Canal. The disruption could force more than 3 million barrels per day of Saudi crude to take much longer routes around the west coast of Africa, according to Energy Aspects.tbsnews+1

Taiwan's Formosa Petrochemical Corp had planned to raise throughput to 480,000 bpd — nearly 90% of capacity — in August. President K.Y. Lin said the company secured crude supplies for August arrival but warned that "the delivery and arrival of some of these cargoes remain uncertain for now, given the resumption of Middle East conflict". A Chinese refining executive, speaking anonymously, said he expects delays for July-August loading cargoes that will make it difficult to raise output.wkzo+1

China Holds the Key

While refineries in Asia excluding China are running at 93% to 95% of pre-war levels, China's refinery runs slumped to just 58% of capacity in June, giving it the most room to ramp up. Wood Mackenzie projects China's throughput climbing to 13.96 million bpd in August from 12.63 million bpd in June. China is also less dependent on imported crude, having built large stockpiles it can tap.straitstimes+3

Beijing eased fuel export restrictions for July, but it remains unclear whether the policy will extend into August. Shenghong Petrochemical's 320,000-bpd refinery in Jiangsu province is expected to resume operations in mid-August after a major overhaul.wkzo

Record Margins as Supply Tightens

Russia's ban on diesel exports due to Ukrainian drone attacks on its refineries has compounded the supply squeeze. European diesel profit margins hit a record of $66.25 a barrel, while the U.S. crude-to-fuel products benchmark spread rose to nearly $70 a barrel last week — the highest level on record. For gasoil and jet fuel, Asian refiners' margins have jumped to more than $65 a barrel, up from just above $20 before the war.bloomberg+1

"Margins are set to stay high. There is simply not enough capacity in the world to deal with the double whammy of Hormuz closure and Russian export bans," said Sparta Commodities analyst Neil Crosby.wkzo