Where the Crisis Is Brewing
The five-month-long Strait of Hormuz crisis has left the crude oil market relatively calm on the surface, but the real shock is building and erupting deep within the refined products market.
US diesel crack spreads broke through $97 per barrel on Thursday, approaching the $100 mark and hitting an all-time high. Top Wall Street institutions, including Goldman Sachs, Citigroup, Bank of America, and Jefferies, have issued warnings that the global diesel supply is facing a "perfect storm." The latest forecast from the International Energy Agency (IEA) shows a global oil supply deficit of 1.8 million barrels per day (bpd) this quarter, more than double previous estimates.
Amid multiple supply shocks, three of the world's four major refining centers have experienced varying degrees of shutdowns. Europe and Asia are scrambling to buy US fuel exports, further depleting the already tight US inventories. Bank of America commodities head Francisco Blanch warned, "Unless there is a substantial recovery in supply, the diesel market will remain tight, volatile, and high-priced for a considerable period next year."
Why Crack Spreads Are Exploding
Brent crude oil has been trading in a range of $87 to $90 per barrel this week, with a weekly gain of nearly 5%, but the price action is relatively mild compared to the volatility in the refined products market.
Jefferies analyst Sam Burwell pinpointed the current market structure in a research note released Wednesday: "The tightness in the global oil market is being reflected through crack spreads, not crude oil prices." He noted that wide crack spreads suggest refineries will maintain high utilization rates, which supports crude oil demand.
On Thursday, the US diesel front-month crack spread surpassed the $97 per barrel high set in mid-March, just three weeks after the US-Iran conflict erupted. This signal indicates that the diesel market is in an extremely tight state.
Goldman Sachs commodities expert Daan Struyven told clients that since the Iran conflict began, the firm has consistently believed the Strait of Hormuz shock has disrupted refined products, especially diesel, far more than crude oil. He also cited Kpler data showing Persian Gulf diesel exports have fallen 80% year-over-year, while crude oil exports have dropped 48%, a significant disparity.
Why Three Major Refining Centers Are Simultaneously Damaged
Bank of America's Francisco Blanch noted in a report titled "Diesel's Perfect Summer Storm" that this industrial fuel has experienced "substantial disruption" in three of the world's four major regions.
Middle East: The closure of the Strait of Hormuz and surrounding military activities have sharply reduced Middle Eastern fuel exports. The recent Houthi attack on Saudi Arabia's Jazan refinery is the latest example. According to HSBC analysts, the Strait of Hormuz currently sees about 10 ships transiting daily, down from 30 to 40 before the conflict escalated, with liquid cargo flows averaging about 4 million bpd, well below the public estimate of 9 million bpd.
Russia: Ukraine's continued drone strikes on Russian energy infrastructure have caused record-level disruptions to Russian refining, removing a significant amount of output from the global diesel supply pool. Additionally, Moscow has announced a ban on diesel exports, further exacerbating the global supply contraction.
China: Due to concerns over domestic shortages, China has yet to restart oil product exports to Asia. Jefferies data shows that after the Strait of Hormuz closure, Chinese crude imports plummeted by about 5 million bpd. While July saw a slight month-over-month recovery of about 1 million bpd, the gap from the five-year average of around 11 million bpd remains about 3 million bpd.
Why the US Alone Can't Drain Its Inventories
Against the backdrop of damage to the three major refining centers, the US has become the only major refining center operating normally, with Europe's reliance on US exports reaching historic highs.
However, sustained exports are draining the tight US inventories. Citigroup research energy strategy head Anthony Yuen warned clients that global observable diesel inventories are now "below the five-year minimum," noting the last time inventories were at similar levels was in 2022, when global diesel crack spreads were about $20 per barrel lower than current levels.
Meanwhile, US crude oil inventory data showed a divergence, with crude stocks surging by 17.4 million barrels last week, the largest weekly increase since January 2023, due to weaker exports and increased imports from Saudi Arabia and Venezuela. This data briefly suppressed oil prices but did not change the tight refined product market structure.
US refinery utilization rates, while slightly down from the previous week, remain near 20-year seasonal highs, indicating that refineries are maximizing capacity utilization driven by high crack spreads.
Why Negotiation Stalemate Adds Uncertainty
The direction of the Strait of Hormuz crisis remains the biggest market variable. Brent crude briefly fell below $80 per barrel last week as the market hoped for a deal through Iran-Oman mediation to reopen the waterway. However, as negotiations stalled again this week, oil prices rebounded to around $90.
President Trump posted on Truth Social Wednesday that the US has "total control" over the Strait of Hormuz and said, "I think we'll keep it that way," suggesting the economic blockade strategy will continue. US-Iran talks are currently deadlocked, with the Trump administration maintaining a blockade on Iranian ports and Tehran demanding war reparations. Pakistan, acting as a mediator, says broader peace talks have stalled.
Prediction market Polymarket shows that the probability of a "60-day US-Iran negotiation extension" has plummeted from 80% a week ago to about 25%.
Saxo Markets strategist Charu Chanana said market volatility will remain high until the Strait of Hormuz reopens and production outlook becomes clear. Goldman Sachs co-head of global commodities research Samantha Dart previously told the media that the global diesel supply shortage is "what keeps her up at night."
How China's Variable Could Reshape the Market
In the current supply crisis, China's actions are seen as the biggest uncertainty factor.
Sam Burwell noted that with such high crack spreads, the market is questioning when China will begin increasing crude imports to export more refined products or replenish its own product and petrochemical stocks. Import data over the coming months will be a key indicator to test the resilience of China's demand.
If China's crude imports return to the five-year average of about 11 million bpd, it would represent an incremental demand of about 3 million bpd, which would provide significant support for crude oil prices.
Burwell concluded that the current market structure is broadly bullish for crude oil prices, as wide crack spreads will drive refineries to maintain high utilization rates, supporting crude oil demand. However, until the Strait of Hormuz situation becomes clear, the refined products market, especially diesel, will continue to be the most sensitive barometer of this energy crisis.
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