Washington: Oil markets are facing another period of uncertainty as wars in the Middle East and Ukraine disrupt major fuel supply routes and damage refining capacity. The disruption is creating an unusual situation in which refiners in the United States and India are benefiting from strong international demand, while consumers in several countries are facing sharply higher prices for diesel and other fuels.
The shortage is particularly serious in the market for refined fuels. Diesel, jet fuel and gasoline are becoming harder to secure as refineries in parts of the Middle East and Russia struggle to operate normally. The Strait of Hormuz has also become a major concern for energy traders because continued disruption to shipping through the important waterway has made it more difficult to move crude oil and refined products between major markets.
Oil prices rose to a three week high on Wednesday, with Brent crude trading close to 92 dollars a barrel. The increase reflects growing concern that disruption around the Strait of Hormuz could continue for longer than previously expected. The uncertainty has added a risk premium to oil prices and has made fuel buyers more willing to pay higher prices to secure supplies.
For American refiners, the situation has created an opportunity to increase exports. Refineries in the United States are operating at high levels and sending large quantities of diesel and jet fuel to overseas markets. American distillate exports reached about 1.9 million barrels a day in early August, according to recent market data.
However, the strong export business is creating a difficult problem at home. American fuel inventories are already low, while diesel prices have climbed sharply. The price increase is affecting truck drivers, farmers, manufacturers and other businesses that depend heavily on diesel. Higher transport and production costs could eventually be passed on to consumers through more expensive food and other goods.
The situation is also becoming politically sensitive in the United States as the country moves towards the November midterm elections. Refiners are making large profits by selling fuel into markets where prices are high, but the increase in domestic fuel costs is putting pressure on the government to find ways to protect consumers.
India is also benefiting from the global shortage because of its large and modern refining industry. Indian refineries have been operating close to full capacity, allowing the country to process large amounts of crude oil and export petroleum products to markets facing shortages.
New Indian government data show that crude oil imports rose more than 9 percent in July from the previous month to 21.41 million tonnes. At the same time, petroleum product exports increased by more than 8 percent from a year earlier to about 5.03 million tonnes. The figures show how important India's refining sector has become during the current disruption.
India's advantage comes from its ability to buy crude from several different sources and turn it into valuable finished fuels. This gives Indian refiners more flexibility at a time when many countries are struggling to secure diesel and other petroleum products.
But the situation is not entirely positive for India. Indian refiners are also facing higher costs because crude supplies have become more expensive. Discounts on some Russian crude have narrowed, while disruptions to Middle Eastern supplies have increased competition for alternative cargoes. This means that higher refining profits do not automatically translate into cheaper fuel for Indian consumers.
Russia is facing the opposite problem. A country that has traditionally been one of the world's major exporters of refined petroleum products is now importing fuel from Asia. Repeated attacks on Russian refineries have reduced domestic production, forcing Moscow to look overseas for additional supplies.
China could provide some relief to the international market. Beijing has eased restrictions on refined fuel exports for a second consecutive month, creating the possibility of more Chinese fuel reaching international buyers. However, China's additional exports may not be enough to completely close the supply gap created by the disruptions in Russia and the Middle East.
The global fuel market therefore remains highly fragile. Refiners in the United States and India are in a strong position because they have the capacity to produce fuel when other suppliers are struggling. Their ability to respond quickly has made them important suppliers to countries facing shortages.
Yet the current situation also shows how quickly a global energy advantage can become a domestic problem. Higher exports can bring greater profits and help other countries maintain supplies, but they can also leave producing countries with smaller inventories and higher prices.
For consumers, the biggest concern is that the shortage could continue into the coming months. If the conflicts continue, refinery disruptions remain severe and shipping through the Strait of Hormuz stays restricted, diesel and other fuel prices could remain elevated.
The global energy market is therefore entering a critical period. The United States and India may continue to benefit from their strong refining industries, but their gains are closely connected to a wider crisis that is putting pressure on businesses, farmers, transport operators and households around the world. The longer the disruption lasts, the more important reliable refining capacity and secure supply routes will become.