For much of the modern oil era, the market’s main concern was whether producers could supply enough crude. That question still matters, particularly during the severe Middle Eastern disruptions of 2026.
But recent events have exposed another constraint: even when crude is available, the refining system may not be able to produce enough of the fuels consumers need, in the right specifications and in the right places.
The refining margins climbed to record highs as diesel, jet-fuel and gasoline cracks surged.
What are crack spreads?
Crack spreads are indicators of the profitability of refining crude oil into petroleum products such as gasoline and diesel. One common crack spread is calculated by subtracting the spot market price of a gallon of crude oil from the wholesale price of a gallon of refined product.
The pressure has now spread to fuel oil, traditionally one of the least valuable parts of the barrel. The global market could face adeficit of 218,000 bpd in Q3 2026, compared with only 6,000 b/d a year earlier. Stocks in Singapore, Fujairah and the Amsterdam-Rotterdam-Antwerp hub were already about 30% below three-year seasonal averages. Singapore VLSFO had risen 76% since the Iran war began, versus a 40% increase in Brent.
The contrast with crude is striking. Global oil supply recovered by 2.4 million b/d in July to 101.5 million b/d, while refinery throughput remained nearly 5 million b/d below the previous year at 80.9 million b/d.
This is the crude-product disconnect: more crude does not automatically mean more usable fuel.
Which factor will determine whether today’s high refining margins can last?
Refiners Are Optimising the Barrel
High crack spreads give refiners a strong incentive to change how they use each barrel. The decision is no longer simply whether to increase crude throughput. Refiners must also decide which units to run, which intermediate feedstocks to process and which products to maximise.
When diesel and jet-fuel cracks rise, a complex refinery can increase the use of hydrocrackers and other secondary units. Fuel oil, vacuum gas oil and residual streams that might otherwise be sold can instead be processed into higher-value transport fuels.
In June 2026, distillate fuel accounted for 29.6% of US refinery yield and jet fuel for 12.4%, while residual fuel oil accounted for only 1.7%.
Global capacity figures can therefore be misleading. OPEC estimates that refining capacity reached 103.66 million b/d in 2025, against throughput of 86.89 million b/d. The apparent gap of almost 17 million b/d is not interchangeable spare capacity. Some plants are offline; others can process crude but lack the hydrocrackers, cokers or desulphurisation units needed to maximise scarce products.
What matters is not simply how much crude a refinery can process, but what it can turn that crude into.
Refining Is Moving Away From Consumption
The current shock has exposed a longer-term geographical shift. Europe has lost 28 refineries larger than 30,000 b/d through closures or conversions since 2009, while newer, more complex plants have been built in the Middle East, India, China and Africa.
The IEA expects 4.2 million b/d of new capacity between 2024 and 2030, partly offset by 1.6 million b/d of closures. Most additions are in Asia and the Middle East; the Middle East alone is projected to add 860,000 b/d to global product supply.
China is an important but policy-constrained source of flexible supply. Its seaborne crude imports in August 2026 remained almost 40% below their pre-war average, yet light- and middle-distillate exports rose to 963,000 b/d, from 774,000 b/d in July. Refiners could use earlier crude purchases and inventories, while weak domestic demand and high overseas prices encouraged exports. Licences, taxation and energy-security policy still determined how much supply was released.
Fuel oil is therefore caught between lower external supply, greater internal refinery consumption and stronger shipping demand. Its outperformance relative to Brent represents a distinct product-scarcity premium.
Shipping Amplifies the Shortage
Refining’s geographical shift increases shipping demand even without higher consumption. In 2024, global seaborne refined-product volumes fell by 0.7%, but tonne-miles rose by 6.5%. Less product was transported, yet each tonne travelled farther because of refinery closures and Red Sea diversions.
A closed European refinery does not necessarily remove European diesel demand. It may simply replace a local barrel with one shipped from India, the Middle East or the United States.
Longer voyages then feed back into fuel oil. Red Sea diversions and higher sailing speeds added an estimated 800,000–1 million tonnes per month to global bunker demand.
Shipping is therefore not merely the final delivery stage. It determines whether a regional surplus can become usable supply elsewhere—and the fuel consumed in making that connection can deepen the shortage.
The abnormal rise in fuel-oil prices captures the wider change. The market is pricing not only crude scarcity, but also lost product exports, limited conversion capacity and the rising cost of connecting regional markets.
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