The Second Front
Please pay at the pump
In this report: Houthis go to work with 2 key straits now blocked. Global refining is down, and product prices set to move higher. Looking at prices at the pumps in EU & US.
Last week. Brent 17.34% ($13.04) Open $78.00 High $88.38 Low $77.28 Close $88.26
Articles
Yemen’s Houthis declare naval blockade against Saudi Arabia
Video: Global Economy in Peril If Hormuz Crisis Persists, Warns IEA Chief
Europe Faces Diesel Crunch as Inventories Head Toward Multi-Year Lows
Could the US take control of Iran’s southern islands?
Iran war live: US military completes ninth night of strikes on Iran
U.S. Backs Iraq-Syria Oil Pipeline to Bypass the Strait of Hormuz
Trump tells Netanyahu to move forces out of Syria and Lebanon
Khamenei’s advisor threatens full-scale offensive if US attacks continue
Burnham to announce plans for new North Sea oil and gas drilling
‘‘We still have the 80% in the pocket if and when needed, our member countries I am sure will be happy to release those stocks’’- Fatih Birol- IEA Chief
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A second round of hot war has duly become a tailwind for upside on oil prices since last week. What has perhaps been hiding in plain sight is the rally in refiners margins. Pre-war, the refiners profit range was $20 to $27. It is now trading at $63. The last time refining margins looked like this, Russia had just invaded Ukraine and Europe was scrambling for diesel. That was the record. We have never been at refiners margins this high.
Nine percent of global capacity is out across the Gulf, Russia and China, on top of the 9.7 Mb/d the industry had already closed since 2019. The refining margin has tripled. That gap is what the consumer pays.
Adding fuel to the fire, The Houthis just announced they are enforcing a naval blockade on Saudi Arabia. They are an Iranian backed political and military group from Yemen. They are the small and nimble nightmare that The US navy will now have to deal with on one major front, The Bab al-Mandeb Strait (BAB). Roughly 7% (7mb/d) of global oil output transited BAB in June.
The war now has two naval fronts, where The US navy will have to maintain safe passage across The entire Arabian Peninsula, an approximately 3000 km-5000km stretch. 8
Refining
The refining margin has never been higher in 24 years of data.
‘‘The reduction in crude throughput has cut fuel production by about 10%,” - Natasha Kaneva, head of global commodities research at JPMorgan. “The question now is not when crude supply will resume, but how quickly the global refining system can process crude oil.” According to JPMorgan’s tally, global refining throughput has fallen by 8.4 million barrels per day compared to pre-Iran war levels.
Industrial Info Resources, whose plant-level database is the source of record for refinery outages globally, has Kuwait’s Mina Abdullah still under shutdown - 454 kb/d, dark since March. Mina Al-Ahmadi at 346 kb/d and Al-Zour at 615 kb/d are both running at reduced capacity. In Bahrain, drone attacks caused severe damage to the diesel hydrotreater at Sitra Refinery and restart is not expected until November. Qatar shut Ras Laffan as a precaution in Q2, and it is still at reduced throughput. Iran has attacked 30 refining facilities across the Middle East during the war, according to JPMorgan, covering a region that holds 11.7 mb/d of crude refining capacity. Normalisation, JPMorgan notes, will be difficult without restoration of crude supply chains.
Russia is the variable the market is not watching. Ukraine has struck 19 Russian refining facilities over the past two months, with a combined processing capacity of 4.9 mb/d. Russia’s diesel production has fallen by roughly a third. Russia was the world’s second-largest diesel exporter before any of this happened, moving 800 kb/d a day, about 12% of global diesel exports, according to Lipow Oil Associates. That is now under an export ban.
JPMorgan puts Russia at one fifth of the world’s total lost refining throughput. You will see 70%-80% of capacity struck cited as a figure. That measures sites hit, not sites down. The number that does not get quoted is China. JPMorgan has 3 mb/d switched off there and not a single drone was involved. Beijing ramped coal, pushed EVs, drew down reserves and cut the gasoline and diesel it had been exporting to Southeast Asia.
“While it is understandable that the market’s attention is focused on Hormuz,” JPMorgan’s Natasha Kaneva said, “one of the most important variables determining global refining supply and demand may now lie nearly 2,000 miles to the north.” The industry came into this year having already closed 9.69 mb/d since 2019. The last significant refinery built in the United States was Garyville, Louisiana, in 1977. There was nothing in reserve.
China
Read below for where China are in their return to the markets and prices at the pumps in EU and US.
