Global oil supply has increased due to resumed shipments from the Persian Gulf, but refining constraints caused by damaged infrastructure, supply chain disruptions, and regional conflicts limit the production of usable fuels. The United States and Russia are key players in the current fuel supply dynamics, with refinery outages and export bans affecting global diesel and gasoline availability.
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Economists have consistently identified the unprecedented disruption to petroleum distribution stemming from the conflict with Iran as a primary area of concern. As relations between Washington and Tehran grew strained in the Strait of Hormuz, pushing crude above $80 a barrel, the economic landscape faced a new obstacle.
# Analysis Required Manufacturing capabilities worldwide now reach this level. The oil shipments from the Persian Gulf that reached markets in recent weeks increased global supply, though the crude requires refining before it becomes usable. Crude oil undergoes refining processes to produce usable materials such as asphalt, plastics, heating oil, jet fuel, diesel, and gasoline.
Global refining capacity remains under considerable limitation. This happened partly because wartime conditions disrupted logistics networks. This also follows Tehran's strikes on multiple oil processing facilities across the Middle East. In more recent months, Ukraine has conducted strikes against energy infrastructure within Russia. When elevated temperatures interfere with the cooling processes refineries require for effective distillation, operational challenges intensify.
Daily refining capacity has declined by 8.4 million barrels compared with pre-war levels — a 10% reduction in fuel production, according to JPMorgan's head of global commodities research, Natasha Kaneva, who noted that the focus has shifted from crude availability to refining capacity constraints.
Oil shipments through the Strait of Hormuz remain below typical levels, with production continuing to fall short of market needs. Tanker movement through the waterway, which had been increasing, has declined following renewed hostilities in the Middle East, Trump's announcement ending the US-Iran Memorandum of Understanding, and the restoration of a naval blockade led by the United States.
Macquarie Research figures show that output from the Middle East has increased by 4 million barrels per day since May, gradually returning to previous levels. Over recent weeks, approximately 200 million barrels passed through the strait, equivalent to 17 days of global supply based on data from Lipow Oil Associates. Despite heightened military operations, petroleum exports continue uninterrupted, with a portfolio manager at Tortoise Capital noting that global supply remains adequate provided transportation routes stay accessible.
The issue remains determining its appropriate use. Oil consumption decreased during the conflict as availability declined and numerous consumers curtailed their usage. This contributed to maintaining costs below forecasts made by most market observers during the conflict, yet it adds complexity to the recovery of energy markets.
JPMorgan data shows China reduced refinery capacity by 3 million barrels daily while the government expanded coal power generation and electric vehicle infrastructure. China drew down its strategic petroleum stockpiles to compensate for interrupted supplies from the Persian Gulf, while cutting back on fuel production for export to regional markets, which intensified shortages across Southeast Asia.
Officials anticipate that authorities will seek confirmation of uninterrupted maritime crude oil transit before domestic refining operations resume full capacity, according to market analysis.
The restart of oil processing operations in the region faces additional obstacles due to the escalation of conflict in the Persian Gulf. The area possesses processing capability of 11.7 million barrels daily, and restarting operations would prove challenging should distribution channels remain blocked. JPMorgan data shows that during the conflict, Tehran struck 30 oil refineries across the Middle East, presenting another obstacle. The operational status of those facilities upon restoration remains uncertain.
The United States stepped in as a primary supplier of gasoline and diesel following the cessation of Middle Eastern fuel exports during the conflict. Refineries in the United States boosted production of jet fuel to meet European demand and diesel to supply markets in Australia and Asia. This limitation on domestic refining capacity contributed to fuel prices remaining elevated, contrary to earlier projections of sharp declines.
For years, the capacity to refine petroleum products has presented ongoing difficulties across the country. California has seen four petroleum processing facilities cease operations this decade amid compliance costs and environmental standards. Marathon's Garyville, Louisiana facility, completed in 1977, remains the most recent petroleum processing plant constructed in the United States with substantial production capacity.
Russia, a major supplier of fuel oil and diesel worldwide, has suspended these exports at a challenging moment. Following Ukrainian drone strikes on its fuel production facilities, Russia implemented a ban on diesel exports the previous week. The country has experienced fuel shortages recently: vehicles have queued at service stations, and prices in certain areas have risen 50% over recent days.
These disruptions have contributed notably to global diesel supply constraints, with analysis indicating Russia's diminished refining output accounts for approximately 20 percent of worldwide capacity reductions. According to Lipow Oil Associates president Andy Lipow, diesel exports from Russia totaled 800,000 barrels daily prior to Ukrainian strikes on refineries, representing 12% of global diesel trade.
This accounts for a substantial portion of the 20% increase in diesel futures observed during the previous three weeks, and fuel costs may persist at elevated levels for an extended period beyond current expectations, even after crude oil supply resumes normal flow, according to Kaneva, who noted that while the Strait of Hormuz situation continues to draw focus, refining capacity dynamics nearly 2,000 miles northward may now represent one of the most influential factors affecting global petroleum product availability.