Oil refiners have stumbled into one of the best profit environments in years. Crude prices have fallen back to where they traded before the Iran war erupted. But gasoline, diesel, and jet fuel remain stubbornly expensive. That combination has pushed refining margins to extraordinary levels, giving refiners a windfall that few expected just weeks after the Strait of Hormuz reopened.
The benchmark U.S. 3-2-1 crack spread—a closely watched measure of refining profitability—recently climbed above $60 per barrel, the highest level on record. Similar gains have spread across Europe and Asia. Every barrel of crude processed is generating unusually large returns because feedstock costs have collapsed faster than refined-product prices.
The crude market changed almost overnight after the U.S. and Iran reached a ceasefire agreement in mid-June. During the months-long closure of the Strait of Hormuz, hundreds of millions of barrels accumulated on tankers and in storage across the Gulf. Once shipping resumed, those barrels began reentering the market.
Middle Eastern crude exports jumped to more than 12 million barrels per day in June from less than 8 million bpd in May, according to Kpler. July exports are expected to edge even higher. Producers are releasing stored crude while simultaneously restarting fields that had been shut during the conflict, creating a temporary wave of supply that the market is still absorbing.
Brent crude has responded accordingly. Prices have retreated to roughly $70 per barrel, which is about where they traded before the conflict began in late February and roughly $50 below their wartime highs. Physical cargoes have weakened even further as Gulf producers compete aggressively for buyers with discounts and favorable pricing.
Related: Iran Strikes 5 Gulf Countries as Regional Escalation Continues
Refiners, meanwhile, are buying cheaper crude into a fuel market that never fully recovered from the supply disruptions created by the war.
Months of interrupted refinery operations, shipping bottlenecks, and emergency exports drained gasoline and diesel inventories around the world. Rebuilding those inventories takes far longer than unloading stranded crude cargoes. A tanker can reach a refinery in weeks. But turning crude into finished fuels and replenishing storage across multiple regions is a slower process.
It’s easy to spot the imbalance in the United States.
Gasoline inventories entered the summer driving season at their lowest level for this time of year in more than a decade, after U.S. refiners boosted exports during the Hormuz disruption to offset overseas shortages. Gasoline crack spreads have surged above $56 per barrel, approaching levels last seen during the energy crisis that followed Russia's invasion of Ukraine in 2022.
And then there’s diesel. The Middle East may have reopened, but one of the world's largest diesel suppliers continues to lose refining capacity.
Ukraine has spent months systematically targeting Russian refineries, storage terminals, fuel trains, tankers, and export infrastructure. Russian crude-processing rates have now fallen to their lowest level in more than 21 years, according to estimates compiled by Energy Aspects. Refinery runs have averaged just 3.91 million barrels per day so far this month—more than 1.4 million bpd below the same period last year.
This weekend, Ukraine confirmed strikes on the Syzran refinery, a fuel train, 10 Russian tankers, four ferries, and damage to the NOVATEK-Ust-Luga processing complex. And that was stacked on top of repeated attacks on larger refining centers, including Omsk, steadily reducing Russia's ability to produce gasoline, diesel, and jet fuel.
Moscow has already restricted gasoline exports, imposed broad limits on diesel shipments, and acknowledged growing domestic shortages. Long lines have formed at filling stations across parts of Russia, authorities are rationing fuel in some regions, and the government has even begun importing jet fuel after years as an exporter.
Every barrel of diesel that disappears from the export market tightens supplies elsewhere. Europe remains especially exposed because Russian diesel was once one of its largest sources of imported fuel, and replacement barrels have become increasingly difficult to find.
That explains why today's refining margins look disconnected from crude prices. The crude market is working through a temporary surplus created by the release of stored barrels. The fuel market is working through months of depleted inventories and continuing refinery outages. Those two markets rarely move on separate tracks for long.
History suggests the gap eventually closes.
If refiners continue running hard to capture today's margins, crude demand rises with every additional barrel processed. The temporary glut created by the Hormuz reopening will gradually disappear as stored oil is absorbed into the global system. Producers across the Gulf are also unlikely to maintain steep discounts indefinitely if inventories normalize.
Fuel prices could also come back down, though that outcome depends heavily on Russian refining. Every successful Ukrainian strike delays the return of diesel exports and prolongs the inventory rebuild. Several refineries across the Middle East also continue to operate below normal capacity after sustaining damage during the conflict, which has limited how quickly additional products can reach the market.
The result? An unusually distorted oil market. Crude has largely recovered from the biggest shipping disruption in modern history. Refined products are still recovering from the consequences. Refiners happen to be sitting in the narrow space between those two realities. That has produced record profits. Markets rarely leave opportunities like that untouched for long.
By Julianne Geiger for Oilprice.com
