Trump announces tougher economic pressure on Iran

The ongoing conflict in Iran has caused severe disruptions to the global oil refining industry, leading to a potential energy crisis that could persist for years. Despite the oil market adapting to the loss of crude supplies from the Middle East, the refining sector has faced significant challenges. Even though the price of benchmark Brent crude oil has declined from its wartime peak, refined products such as diesel and gasoline have seen dramatic price hikes.

European diesel prices have surged more than 70%, while U.S. gasoline prices have climbed around 60%.

The war has resulted in a notable decline in refining output, with more than 20% of the Middle East's refining capacity knocked out, according to the International Energy Agency. Additionally, fuel exports remain suppressed due to the closure of the Strait of Hormuz. Many refiners, particularly in Asia, have reduced operations, and the closure of the Strait has further exacerbated the situation.

Russia's refining throughput has dropped by nearly 30% due to relentless strikes on Russian energy infrastructure, forcing Moscow to ban diesel exports in July. This, combined with reduced global oil stocks and strained refining systems, has created a significant gap in global fuel production. Refinery runs in the second quarter were 5.1 million bpd lower than a year earlier, and demand for refined products fell by 4 million bpd in the previous quarter.

Projections suggest a further decline in refinery runs and a smaller-than-expected demand reduction in the third quarter.

While a diplomatic breakthrough between Washington and Tehran reopening the Strait of Hormuz could lead to a drop in crude prices, it may not bring quick relief to the refined product market. Many Gulf refineries suffered damage during the war, and repairing them will take considerable time. The world's second-largest refiner, China, has also limited its processing rates and curtailed fuel exports, which could lead to increased demand destruction.

The situation is further complicated by the fact that fuel inventories are at their lowest for this time of year in three decades, with U.S. diesel stocks at their weakest seasonal level since 2012. Even if a diplomatic solution were to reopen the Strait, the longer-term impact on fuel supply and demand is likely to persist, potentially leading to sustained energy-driven inflation this winter and beyond.

Recent inflation data already supports this outlook, with U.S. consumer prices rising 3.4% in July from a year earlier, with energy costs up 14.7%, including a 24.6% increase in gasoline prices.