Hormuz oil debate misses Asia’s fuel squeeze

A critical debate within the crude oil market is misguided, with attention focused on the amount of oil passing through the Strait of Hormuz rather than the constrained flows of refined products throughout Asia. U.S. Energy Secretary Chris Wright has repeatedly argued that more crude is getting through the disputed strait than vessel-tracking analysts like Kpler can observe.

One of Wright's claims was that around 15 million barrels per day (bpd) exited the Strait of Hormuz on a particular day last week, which, if accurate, would bring volumes close to pre-U.S. and Israeli attacks on Iran in February. Another claim stated that transits averaged about 9 million bpd over a seven-day period, though no specific dates or details were provided.

However, vessel monitoring services estimate that approximately 5 million bpd is leaving the Strait of Hormuz, including both dark transits and ship-to-ship transfers from smaller vessels to larger tankers in the Gulf of Oman. The dispute over crude oil volumes is a false debate, as Asia's oil imports will begin to increase if Wright is correct. This is because the crude he claims is leaving the Middle East will arrive at ports.

In the meantime, Asia's refined products markets remain strained. August imports of light and middle distillates for Asia are estimated by Kpler at 5.59 million bpd, close to the July figure of 5.60 million bpd. This represents a 21% decrease from the 7.08 million bpd average observed in the three months leading up to February.

The impact of the refined products shortage is not spread evenly across Asia. Less affluent countries are bearing a heavier burden of the reduced product volumes. For instance, Indonesia's imports of light and middle distillates for August are estimated at 432,000 bpd, down from an average of 533,000 bpd in the months prior to the Iran conflict. The Philippines is also expected to receive 257,000 bpd in August, down from the 362,000 bpd average over the same period in 2022.

Wealthier countries, like Australia—the world's largest importer of diesel—have managed to secure relatively stable fuel supplies, with August imports estimated at 863,000 bpd, only slightly below the 880,000 bpd average in the three months prior to the Iran war. However, the cost of securing fuel is high, with product prices near record highs and refining margins remaining elevated.

The refining crisis has been most pronounced in middle distillates, due to the limited supply of Middle East crudes, many of which are medium gravity. Asia's refineries are optimized to process this type of oil into products such as diesel and jet fuel. Even gasoline, the primary light distillate, is experiencing a high premium, with a profit margin of $20.74 per barrel on August 21, a 159% increase from $8.00 on February 27.

The message from the market is clear: while there may be sufficient crude oil reaching Asia, it may not be the correct grades needed, particularly for wealthier nations that lack spare refining capacity and are struggling to meet demand.