The supply shock emanating from the Strait of Hormuz’s closure and the ongoing Russia-Ukraine war is anticipated to lead to a global refining crunch as crude supplies deplete.
Global refiners said they were not having problems getting crude feedstock yet, but warned that buffers such as inventories and oil stored at sea would drain quickly, emphasising there was no substitute for reopening the Strait of Hormuz to alleviate the Middle East supply shock.
The May edition of the International Energy Agency’s (IEA) Oil Market Report forecast refinery crude throughputs to plunge by 4.5 million barrels a day in the second quarter of 2026 to 78.7 million barrels a day, and by 1.6 million barrels to 82.3 million barrels for 2026 as a whole.
This reduction will come as operators contend with infrastructure damage, export restrictions, and lower feedstock availability.
The IEA said that more than 10 weeks after the war in the Middle East began, mounting supply losses from the Strait of Hormuz were depleting global oil inventories at a record pace.
The agency said: “Benchmark oil prices have posted wild swings in response to conflicting signals on whether the United States and Iran will soon reach a deal to end the conflict.”
It added that refining margins remained at historically high levels, supported by record middle distillate cracks, and refiners were adapting to the crisis with new trade flows emerging to compensate for lost Gulf product exports.
However, IEA explained that high refining margins were not simply a sign of profitability, but also one of stress. Sharply rising margins usually meant the market was paying refiners more to turn crude into usable fuels because finished product supply was tight relative to demand.
The agency said: “On the supply side, Saudi Arabia and the UAE have successfully redirected some exports to terminals loading outside of the Strait.
“At the same time, stocks from commercial and government strategic storage sites in consuming countries are flowing into markets to offset part of the losses.
“On the demand side, refiners have reduced runs and sharply scaled back crude imports.
“Chinese seaborne crude imports fell [and] major reductions in imports were also seen in Japan and India.
“But while the slowdown in global refinery activity – by around five million barrels a day year-on-year in April – has temporarily eased tensions in the crude market, tightness is quickly spreading to product markets.”
War-linked disruptions tied to the Iran conflict and Russia-Ukraine war had affected nearly 9 per cent of global refining capacity, according to Reuters, when outages and processing cuts across multiple regions were counted together.
Reuters also pointed to additional throughput reductions in Asia and Europe due to disruptions in crude feedstock and logistics.
The Russian contribution to the global refinery crunch recently intensified significantly, with nearly all major oil refineries in central Russia either halted or scaling back fuel output after Ukrainian drone attacks.
The combined capacity of affected sites exceeds 83 million tonnes per year, accounting for a large share of Russia’s gasoline and diesel production.
Major sites under pressure include Kirishi (one of Russia’s largest refineries), Moscow, NORSI in Nizhny Novgorod (one of Russia’s largest gasoline producers), Ryazan (which accounts for a meaningful share of Russia’s total refining volume), and Yaroslavl.
HORMUZ REOPENING SOON “WISHFUL THINKING”
Self-dubbed “contrarian” investment research firm HFI Research has described assumptions by analysts such as JPMorgan Chase, Goldman Sachs, and Morgan Stanley that the Strait of Hormuz would reopen sometime in June as wishful thinking.
HFI argued that logistical realities, inventory collapses, and geopolitical anchoring had locked the market into deeper pain, far beyond the optimistic assumptions of the Wall Street analysts, who were also betting prices would hold around US$100 through year-end.
Central to HFI’s thesis is its calculation of the implied oil flow for May, which amounted to negative 7.5 million barrels a day, meaning that the point of no return had been crossed, “quick-fix assumptions were wishful thinking”, and “a rude awakening awaited those still pricing in normality”.
Asia is the world’s most exposed region to supply shocks from conflict in the Middle East, with Japan (about 70 to 73 per cent of oil imports are via Hormuz), South Korea (about 65 to 70 per cent), India (about 40 to 50 per cent), and China (about 40 to 45 per cent) dominating flows through the Strait of Hormuz.
These countries also rely heavily on LNG from Qatar and the United Arab Emirates.
The developing nations of the “global south” are most vulnerable to the shock’s second-order effects, including higher food and fertiliser costs (from energy and transport), energy poverty, and balance-of-payments stress.
Strategists have warned that plummeting global oil stockpiles and inventories might not recover until December 2027, with physical shortages looming over Europe by the end of May.
Societe Generale analysts led by Mike Haigh, Managing Director of FIC and Commodities Research, said oil markets were operating under a “veneer of stability”, but the underlying system remained “acutely stressed”.
They said: “Inventories are falling quickly, and critically, only a small share of global stocks is truly usable without pushing the system into operational stress.”
The analysts said that even if the Strait reopened in early June, the physical sequence of tanker transit, discharge, refining and distribution would still delay any meaningful increase in supply by at least 52 days.
They explained: “Even as flows resume, the delayed timing embeds a deeper inventory deficit, prolonging tightness into 2027 and pushing full normalisation further out, highlighting how sensitive the system is to even small shifts in reopening timing.”
Jeff Currie, Executive Co-Chairman at Abaxx Commodity Exchange, said that physical shortages could hit Europe any day now, and the severity of the ongoing supply crunch was not yet reflected in oil prices or policymakers’ remarks.
He noted that oil supply concerns would intensify as inventories were depleted, adding that once the shortages hit, prices would go “non-linear”.
Currie said: “Then we find out what the willingness is of somebody to pay for that last molecule.”
