Shipping bottlenecks and impaired refining supply lift diesel and refined-product prices, while falling inventories leave the risk of price spikes intact

Overview

This report discusses the effects of the Middle East conflict, restricted transit through the Strait of Hormuz, and the Russia-Ukraine war on global diesel and other refined-product markets. HSBC's core view is that corporate costs and the inflation outlook should focus more on refined products than crude oil alone: amid constrained refining supply, declining inventories, and pressure on alternative shipping routes, product markets such as diesel have become materially tighter than crude markets.

Core views

The Middle East conflict remains the main driver of global commodity markets. The Strait of Hormuz is effectively closed, with a near-term resolution of the conflict or a return to pre-war transit conditions unlikely; Houthi attacks on Saudi vessels in the Red Sea could also disrupt passage through the Bab el-Mandeb Strait, a route that had been helping alleviate pressures caused by restrictions at Hormuz. Average daily vessel traffic through the Strait of Hormuz briefly recovered to 36 vessels in late June, but has recently fallen back to just 12 vessels, far below the pre-war normal level of around 138 vessels; average daily traffic through the Bab el-Mandeb Strait in the first half of August also fell to 27 vessels from 36 in June. As a result, global commodity prices have risen 13% from their late-June trough, while Brent crude has climbed 34% from a low of around USD70/bbl in early July to approximately USD94/bbl, though it remains below its late-April peak of more than USD120/bbl. The report emphasizes that refined-product prices matter more than crude prices when assessing corporate costs and inflation, because end consumers and businesses actually use refined products such as diesel and jet fuel. Refined products have risen more sharply because supply is simultaneously constrained by lower crude feedstock availability, reduced Middle East refinery supply, a lack of spare capacity across the global refining system, and low product inventories. The US diesel crack spread, a measure of the profitability of refining crude into diesel, rose above USD100/bbl this week to a record high, exceeding levels seen during the first winter fuel shortage of the Russia-Ukraine war in late 2022. Even with US and European refineries operating close to full capacity, and US refinery utilization reaching 97.2% in mid-August, the supply shortfall has not been filled. Diesel-market tightness has also been exacerbated by Russia-related disruptions. Diesel exports from Russia, the Middle East, and Asia fell by 1.3mb/d year on year in July, accounting for around 20% of global seaborne diesel trade. Russia is typically the world's second-largest diesel exporter, accounting for around 11% of global supply; following intensified Ukrainian attacks on its energy infrastructure, an estimated 40% of Russian refining capacity is offline. Russia has extended its ban on key refined-product exports to 31 January 2027. Although producers are exempt from restrictions on exports of diesel, bunker fuel, and gasoil from 1 September, Russia has begun importing diesel, creating an additional source of demand in an already tight market. Meanwhile, strong truck-transport demand from farmers during the harvest season and pre-holiday stocking in the fourth quarter, combined with diesel's low price elasticity, has kept demand resilient; US middle-distillate inventories are currently 12% below the five-year average. Other refined products are following a similar trajectory. Singapore benchmark jet fuel prices have risen 41% from a late-June low of USD111/bbl to approximately USD155/bbl; although the end of the summer travel peak may exert some downward pressure on prices, the jet fuel premium to Brent continues to widen. European jet fuel inventories have fallen to around one month of supply. Since early July, naphtha prices have increased 19%, while bunker fuel prices have risen nearly 30%. The report considers the continued release of high inventories, particularly the drawdown of Chinese inventories, to have been the main buffer preventing even larger increases in crude and refined-product prices. However, there is substantial uncertainty over how long inventories can continue to decline and when they may reach critical levels; if supply disruptions persist and inventory buffers are exhausted, the market could experience nonlinear or "tipping-point" price spikes.

Analysis framework

The report first uses changes in vessel traffic through the Middle East conflict zone and two key shipping lanes to illustrate logistical constraints, then compares crude and refined-product price performance. It subsequently explains the widening diesel crack spread through refinery utilization, lower diesel exports, damaged Russian refining capacity, resilient demand, and inventory levels, and uses price and inventory data for jet fuel, naphtha, and bunker fuel to demonstrate that tightness has spread to other refined products.

Methodology notes

• Industry/sector analysis frameworkSupply-demand framework

  Refined-product supply-demand and inventory balance analysis

  The report treats shipping disruptions, refinery shutdowns, and lower exports as supply contraction; agricultural and transportation demand as resilient demand; and low inventories as evidence that market buffers are weakening.

• (Method outside the vocabulary)

  Diesel crack spread

  The crack spread measures the profitability of refining crude oil into diesel, or the degree of product tightness relative to crude; the report uses its move above USD100/bbl to show that diesel-market tightness exceeds that of the crude market.

Key data

• Brent crude priceApproximately USD94/bblUp 34% over the past seven weeks; also up 34% from a low of around USD70/bbl in early July, but still below the late-April peak of more than USD120/bbl.
• Global commodity pricesUp 13% from the late-June troughReflects the broader increase caused by recent shipping and supply disruptions.
• Average daily vessel traffic through the Strait of HormuzApproximately 12 vessels/day recentlyIt briefly rose to 36 vessels/day in late June, versus a pre-war normal level of around 138 vessels/day.
• Average daily vessel traffic through the Bab el-Mandeb StraitApproximately 27 vessels/day in the first half of AugustBelow 36 vessels/day in June.
• US diesel crack spreadMore than USD100/bblReached a record high this week, exceeding levels during the fuel-shortage period in late 2022.
• US refinery utilization97.2%Near full-capacity operation in mid-August 2026.
• Decline in diesel exportsDown 1.3mb/d year on yearThe combined decline for Russia, the Middle East, and Asia in July 2026, equivalent to approximately 20% of global seaborne trade.
• Share of Russian refining capacity offlineApproximately 40%Related to damage to energy infrastructure during the Russia-Ukraine war.
• US middle-distillate inventories12% below the five-year averageMiddle distillates include diesel and heating oil.
• Singapore jet fuel priceApproximately USD155/bblUp 41% from a late-June low of USD111/bbl.
• European jet fuel inventoriesApproximately one month of supplyIndicates a low jet-fuel inventory buffer.
• Naphtha and bunker fuel pricesNaphtha up 19%; bunker fuel up nearly 30%Both increases are since early July.

Impact & implications

HSBC believes that rising refined-product prices may have greater implications for corporate operating costs and inflation transmission than crude prices themselves. High refinery utilization has failed to offset lower exports and damaged refining capacity, while low inventories have weakened the market's buffer against persistent disruptions; if shipping restrictions and supply interruptions persist, prices face the risk of further sharp increases.

Risks

• If restrictions at the Strait of Hormuz persist, or disruption at the Red Sea's Bab el-Mandeb Strait intensifies, crude and refined-product logistics could be further constrained.
• Damage to Russian refining capacity, export restrictions, and its shift toward importing diesel could further tighten global diesel supply.
• If continued drawdowns in high inventories bring them to critical levels, refined-product prices could experience nonlinear or tipping-point upside.

What to watch

• Whether average daily vessel traffic through the Strait of Hormuz and the Bab el-Mandeb Strait recovers.
• Progress toward a ceasefire in the Middle East conflict and whether shipping lanes can return close to pre-war normal conditions.
• Russian refining-capacity restoration, refined-product export policies, and changes in its diesel import demand.
• The duration of inventory releases in China and elsewhere, and whether US middle-distillate and European jet fuel inventories decline further.