Analysis: Refiner Cuts Likely Without Hormuz Reprieve


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Global refined fuels production and inventories may continue 
to decline just as demand reaches its seasonal peak this summer if the Middle 
East supply squeeze does not get resolved in time, suggesting possible 
shortages, further price hikes and consequential demand destruction.

   Faith Birol, director of the international Energy Agency (IEA), warned this 
week that commercial crude oil inventories could only cover a few more weeks of 
current refiner demand, and said that the global market could hit a "red zone" 
by July or August.

   Global oil inventories have been shrinking at an unprecedented pace since 
the U.S.-Israeli war on Iran has kept roughly a fifth of global petroleum 
liquid supply off the market since early March.

   A lack of supply will force refiners to throttle runs, squeezing an already 
tight fuels market even further, raising the risk of price-induced fuels demand 
destruction and acute fuel shortages in some parts of the world.

   The IEA, in its latest monthly oil market report, said that observed global 
inventories shrank at a pace of 4.16 million bpd in March and 3.9 million bpd 
in April. Balance estimates implied much steeper stock draws to the tune of 
5.63 million bpd and 5.31 million bpd in these two months.

   The true impact on stockpiles at some of the globe's most important refining 
hubs situated in oil importing countries was masked by rapidly swelling 
inventories in the Middle East, where crude oil quickly backed up into every 
available storage option amid the near complete loss of export capacity.

   Excluding these barrels which remain inaccessible to global refiners, the 
Paris-based energy watchdog estimates global oil stocks to have fallen at a 
rate of 6.2 million bpd since the start of the war.

   Logistical constraint induced demand destruction feathered some of the 
impact the largest oil supply disruption in history has had on inventories. 
Global supply fell by 12.8 million bpd since the start of the war, but the 
sudden loss of their main crude oil stream forced refiners particularly in Asia 
to throttle runs.

   Soaring operating costs, from crude oil to LNG to tanker rates, had refiners 
cut back further. In April, crude inputs in Chinese refineries plunged to the 
lowest level since August 2022, when strict COVID-lockdowns stymied domestic 
fuel demand, official government data from the National Bureau of Statistics 
showed. Globally, the IEA expected refinery crude inputs to plunge by 4.5 
million bpd in the second quarter of 2026.

   High prices may stifle demand and incentivize more production down the line. 
But the global deficit is set to steepen in the immediate future should the 
Strait of Hormuz remain untraversable. The U.S. Energy Information 
Administration (EIA) estimated that the global balance flipped from a 3.81 
million bpd surplus in the fourth quarter of 2025 to a 670,000-bpd deficit in 
the first quarter of this year, and forecast global petroleum liquids stocks to 
plunge by 8.47 million bpd in Q2.

   Oil exports from the Persian Gulf may soon resume given U.S. efforts to 
reach a diplomatic solution with Iran over the Middle East conflict that seized 
up energy shipments in the Strait of Hormuz since early March.  But inventories 
are unlikely to experience immediate respite.

   In fact, forecasts by both the IEA and EIA assume that flows will only 
gradually return from June. Given long voyage times, scarce dirty tanker 
availability in the region, and the scale and duration of production shut-ins, 
refiners in Asia are likely to continue drawing from stockpiles for months and 
will be slow to resume operations at a pre-war pace.

    

OECD Commercial Crude Oil Inventory Projection
                   4Q25   1Q26   2Q26   3Q26   4Q26   1Q27   2Q27   3Q27   4Q27
U.S.               1286   1289   1260   1280   1272   1284   1325   1319   1303
Other OECD         1530   1489   1265   1133   1160   1230   1275   1328   1413
Total OECD         2816   2778   2525   2413   2432   2514   2600   2647   2716
Net Change                -38    -253   -112   19     82     86     47     69
(Source: EIA)

    




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