Refined oil products caught in Iran war energy shock maelstrom

The sharp rise in refined oil product prices is intensifying the economic fallout from the latest energy shock, compounding the effects of disrupted crude flows and tightening supply chains.

“The surge in the prices of refined oil products is amplifying the economic impact of the energy crisis,” said Kieran Tompkins, senior climate and commodities economist at Capital Economics, and David Oxley, chief climate and commodities economist said in a note.

They added that “countries in Africa that ordinarily source oil products from the Middle East have been most directly affected, but the blow-out in oil product margins means that the economic pain will continue to be felt much more widely.”

The disruption centres on the Strait of Hormuz, a critical artery for global energy markets. “Around three quarters of the ~20m bpd of petroleum that ordinarily flows through the Strait of Hormuz each day is crude oil destined for refiners in the rest of the world,” the economists said. “Nearly 90% of crude oil exports that transit the Strait go to Asia,” underlining the region’s vulnerability to prolonged disruption.

Refined products account for the remaining flows, with the Middle East responsible for about 11% of global refining capacity. As supplies have tightened, the impact has been most acute for net importers. “Net importers of refined products that ordinarily receive a large proportion of these from the Middle East have been the most directly affected by the cessation of flows,” Tompkins and Oxley said, identifying Pakistan and several Sub-Saharan African economies as particularly exposed.

The shock is rippling across the oil market. “The crunch in the flow of crude oil from the Middle East is also having a cascading impact throughout the oil sector,” they said, noting that refiners are paying steep premiums for alternative crude grades. Oil from Oman, which avoids the Strait, has surged above $150 per barrel, reflecting intense competition for supply.

At the same time, constraints in refining capacity are exacerbating shortages. “The combination of higher input costs for refiners and pre-emptive reductions in refinery runs to ration stocks has led to even deeper strains in the market for refined products,” the economists said. As a result, margins have widened sharply, particularly for diesel and jet fuel, with “some products trading in excess of $200 per barrel”.

While similar dynamics were observed during the 2022 energy crisis, the scale of the current disruption is more pronounced. “The scale of recent moves is unusual, and is amplifying the effect of the current crisis and will contribute to greater upward pressure on headline inflation than usual relationships with crude oil would suggest,” they said.

“The situation clearly remains fluid and fast moving,” the economists added, warning that “the reshaping of the global energy market will be more intense and longer-lasting in an adverse scenario than in our baseline.”