American drivers just paid the highest Labor Day gasoline prices ever and an Iran-aligned group is attacking refining assets
The world is missing about 5 million to 6 million barrels of refined fuels.
Dwindling global refinery capacity is threatening to turn what started as a Middle East oil-supply crisis into a more complex global oil headache impacting gasoline, diesel and other fuels.
Drone and missile attacks launched by the Iran-backed Houthis on refineries and oil infrastructure in Saudi Arabia have aggravated long-brewing problems with the supply of Middle Eastern oil products. Further refinery constraints in Russia and in China have added to the bottleneck of refined products.
Closer to home, those dynamics are showing at the gas pump. This past Labor Day weekend, American drivers paid the highest prices for gasoline ever recorded for the holiday, according to AAA. That capped a summer driving season where gas prices unusually kept moving higher past their traditional peak around the Fourth of July.
And more worryingly, retail diesel prices remain at a record high around $5.90 a gallon, fanning concerns about inflation as global financial markets are under strain from a bond selloff and U.S. dollar weakness. Diesel powers heavy-duty vehicles and machinery, and touches every corner of the economy.
"Higher gasoline and diesel prices of course raise concerns of a recession," said Rob Thummel, a portfolio manager at Tortoise Capital.
See also: The energy market's rising 'crack spread' is threatening to break the American consumer
Matt Smith, an analyst with data platform Kpler, said that global refinery capacity is running at around 80 million barrels of fuels a day, down from a more typical 86 million barrels a day for this time of the year. More refineries in the Middle East and in Russia are offline and China is increasingly prioritizing its domestic fuel market and has cut down on demand for crude, Smith said. Depleted inventories as the war with Iran enters its seventh month compound the problem.
U.S. refiners are running at full tilt and continue to export fuel to much of the world, taking advantage of the "crack" spread, or the margin that oil refiners get for producing fuels like gasoline, heating oil and diesel. That price difference has climbed to records in recent weeks.
"The call is on the U.S. refiners to produce as much as they can," Thummel said. "Higher margins are here to stay, and, unfortunately, gasoline prices probably stay a little bit higher for a little bit longer."
While some Middle Eastern crude cargos are able to transit the Strait of Hormuz, fuel production has been hampered by the recent attacks on the region's infrastructure.
The Houthis launched fresh attacks on Saudi Arabia's oil infrastructure on Tuesday. The Islamist political group in Yemen controls part of the civil-war-ravaged country, and has been locked in a long-running regional dispute with Saudi Arabia.
Reflecting expectations of higher profits ahead, shares of all three major U.S. refiners - Marathon Petroleum (MPC), Phillips 66 (PSX) and Valero Energy $(VLO)$ - gained on Tuesday, contrasting with losses for the broader U.S. stock-market benchmarks.
All three stocks closed at an all-time high on Tuesday.
Meanwhile, London-traded Brent oil futures (BRN00), historically more sensitive to global upheavals, pushed closer to $100 a barrel, while New York-traded WTI futures (CL00) remained above $90 a barrel.
Strong demand for crude products and "a continued standoff" in the Middle East plus the Houthi-Saudi confrontations and the Russia-Ukraine war likely will push oil prices above $100 a barrel, analysts at Eurasia Group said in a note Tuesday.
"A shortage of global refining capacity has added further upward pressure, alongside sustained demand for refined products," they said. Eurasia Group sees "little chance of a resolution to any of the relevant conflicts," they added.
-Claudia Assis
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