Refinery Outages Constrain the Global Supply Response; Goldman Sachs Remains Bullish on Forward Diesel Margins

Overview

The report examines why global refinery runs and product margins have diverged unusually and assesses the impact through a simultaneous model of runs, outages, utilization, and inventories. Goldman Sachs concludes that large-scale outages have shifted the refining supply curve to the left, depressing runs in the short term and subsequently lifting margins through inventory drawdowns. It therefore remains bullish on forward margins, particularly diesel.

Core views

Global product margins have continued to rise over the past two months and are up approximately $30/bbl year over year, driven by the combined effects of escalating tensions in the Middle East, continued attacks on Russian refineries, and a gradual recovery in global demand. Diesel is at the center of market tightness: US diesel margins have climbed above $100/bbl to a record high, even exceeding the crude oil price. Yet global refinery runs remain down nearly 7mb/d year over year, with supply failing to respond to high margins as it normally would. This divergence is not the result of ordinary changes in demand but rather exceptionally severe supply constraints on refining capacity. The first constraint is large-scale unplanned outages in the Middle East and Russia. Approximately 10mb/d of global refining capacity is currently offline, with Middle Eastern outages approximately 2mb/d above seasonal norms and Russian outages approximately 3mb/d above seasonal norms. Saudi Arabia's 0.4mb/d Jazan refinery was recently attacked, while other refineries damaged in March and April remain under repair; Russian refineries continue to face drone attacks. Refineries in both the Middle East and Russia are operating at only approximately 60% of capacity, with utilization since August down 18-20 percentage points year over year. By contrast, US refineries, which have not been constrained by large-scale outages, have responded to higher margins by raising average year-to-date utilization by 3 percentage points. Utilization is now in the high-90% range, at approximately 97%. This means there is limited scope for further US production increases, while postponing planned maintenance could also increase the risk of subsequent unplanned outages. The second constraint stems from China's product export quotas and weak domestic demand. Chinese refinery utilization is approximately 66%, below typical levels. The constraint is not unplanned outages but government export quotas, moderate domestic demand, high retail fuel prices, and the broad availability of alternatives such as electric vehicles, trucks, and public transportation. Goldman Sachs does not expect China to materially change its quota policy in response to higher overseas product prices and views the recent export rebound as normalization following a sharp second-quarter decline rather than a new upward trend. The third constraint is that some countries with retail or wholesale fuel price caps continue to face high crude oil costs. Price caps prevent refineries from passing crude costs through to end consumers, effectively compressing refining margins and reducing the incentive to purchase crude and increase runs. The report uses South Korea, Hungary, and Thailand to illustrate this mechanism, although these countries are not standalone investment themes in the report. In the absence of major supply shocks, refinery runs and margins typically move together positively. Expectations of strong demand lift margins, allowing higher-cost refineries to operate profitably and increase runs. Margins then incentivize refineries with spare capacity to raise production, gradually rebuilding product inventories and ultimately putting pressure on margins. This corresponds to an upward-sloping refining supply curve. Refinery outages shift the supply curve to the left, meaning higher margins are required to incentivize supply at the same level of runs. Historical data support this positive relationship, but global data from March to July 2026 represent a clear outlier because capacity constraints prevented a large number of refineries from responding to high margins. The United States remained more consistent with the historical relationship over the same period because its refineries did not experience outages of comparable scale. Based on this, Goldman Sachs constructs a simultaneous framework for runs and margins: the demand side uses product demand, while the supply side uses lagged product margins and refinery outages to explain global runs. Runs then affect refinery utilization and product inventories, while utilization, inventories, refining costs, and clean tanker freight rates jointly determine the fair value of product margins. Margins, in turn, influence future runs and demand. Historical estimates show that every $10/bbl rise in the average of US gasoline and diesel margins typically increases global refinery runs by 0.6-0.8mb/d in the following month. The reverse effect has a clear time lag. If global refinery runs decline by a sustained 1mb/d, lower utilization reduces the fair value of US diesel margins by $0.7/bbl within one month; the net effect remains slightly negative during the first two months. However, as product inventories continue to decline, the inventory effect gradually overtakes the direct impact of lower utilization, raising US diesel margins by $6/bbl after 12 months, equivalent to 27% of the sample since 2010. News of outages itself also typically raises the risk premium immediately because the market prices in future supply and inventory declines in advance, while fair-value margin adjustments based on actual inventories and utilization occur more slowly. An increase in refinery outages and a decline in global runs do not correspond one-for-one because unaffected refineries increase throughput in response to high margins. The main model estimates that every 1mb/d increase in outages typically reduces global refinery runs by approximately 0.6mb/d; the estimate summarized in the charts is 0.5-0.6mb/d. The same sustained outage shock is expected to raise the fair value of US diesel margins by $3/bbl after 12 months, or approximately 14% based on the sample since 2010. Goldman Sachs believes the actual current uplift may be larger because effective spare refining capacity is limited, particularly in the United States, and further inventory drawdowns have an above-average impact on margins when inventories are already low. Given the uncertain prospects for a near-term easing of geopolitical tensions in the Middle East and, especially, Russia, Goldman Sachs does not expect refinery outages to dissipate quickly. It expects product margins to remain significantly above historical averages for the foreseeable future, with diesel standing out the most. India and the Middle East are expected to add approximately 0.5mb/d of refining capacity over the next 12 months, which could alleviate some of the constraints. However, if attacks on Middle Eastern and Russian refineries persist, the additions will be insufficient to offset current outages. Conversely, if geopolitical tensions ease and outages decline, refinery runs will recover and global supply will gradually alleviate high prices. In terms of asset expression, the Dec26-March27 European diesel forward calendar spread has risen more than 30% since Goldman Sachs identified it in late July as a geopolitics hedge with structural support. Under a persistent-refinery-outage scenario, Goldman Sachs estimates that it still has 50%-60% further upside and continues to view forward diesel calendar spreads and long European natural gas positions as attractive geopolitical hedges.

Analysis framework

The report first identifies the anomaly of rising margins alongside declining global runs, then separately analyzes Middle Eastern and Russian outages, Chinese export quotas and demand, and crude-cost constraints under regulated fuel prices. It subsequently uses the historical supply-curve relationship as a baseline to build a simultaneous model incorporating demand, lagged margins, outages, utilization, inventories, refining costs, and freight rates. The model estimates the bidirectional effects between runs and margins over the short term and 12 months, before mapping a persistent-outage scenario to forward diesel margins and related geopolitical hedging assets.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Refining Supply Curve and Outage Shocks

  The report interprets the positive relationship between runs and margins under normal conditions as an upward-sloping supply curve. Outages reduce effective capacity and shift the supply curve to the left, requiring higher margins to maintain the same output.

• Industry/Sector Analysis Framework

  Simultaneous Model of Refinery Runs and Product Margins

  The model explains refinery runs using demand, lagged margins, and outages, then estimates the fair value of margins using the resulting utilization and inventories together with refining costs and clean tanker freight rates, while allowing margins to affect future runs and demand in turn.

• Event Games and Behavioral FinanceEvent-driven analysis

  Scenario Analysis of Refinery Attacks and Persistent Outages

  Using attacks on Middle Eastern and Russian refineries as triggering events, the report estimates the impact of each 1mb/d increase in outages on global runs and the fair value of US diesel margins after 12 months, and compares persistent-outage and geopolitical-de-escalation paths.

• Industry/Sector Analysis Framework

  Demand-Weighted Product Prices and Refining Margin Definitions

  Global wholesale product prices are demand-weighted averages of relevant price indices in the United States, Europe, and Asia. Global diesel margins are demand-weighted averages of margins relative to Brent crude across the three regions. The US 3-2-1 crack spread measures refining gross margins based on the ratio of two barrels of gasoline and one barrel of diesel to three barrels of crude oil.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Dec26-March27 European Diesel (Gasoil) Forward Calendar Spread

  Persistent refinery outages reduce product supply and inventories, leading Goldman Sachs to view this calendar spread as a geopolitics hedge with structural support.

  Strengths

  It has risen more than 30% since the view was introduced in late July; a further 50%-60% upside is expected under a persistent-outage scenario.

  Weaknesses

  Its upside depends on refinery outages persisting, and the calendar spread has already risen more than 30%.

  Comparison

  The report lists it alongside long European natural gas positions as an attractive geopolitical hedge.

  Risks

  An easing of geopolitical tensions or a decline in outages would increase refinery runs and product supply, weakening support for the calendar spread.

• US Diesel Margins

  Global outages affect their fair value by first reducing utilization and later lowering inventories.

  Strengths

  Currently above $100/bbl and at a record high; a 1mb/d increase in outages is expected to raise fair value by $3/bbl after 12 months.

  Weaknesses

  A decline in runs initially has a negative effect through lower utilization, with a sustained 1mb/d decline in runs reducing margins by $0.7/bbl within one month.

  Comparison

  The report identifies diesel as the center of global product tightness, with a stronger outlook than general product margins.

  Risks

  Geopolitical de-escalation, fewer outages, and a recovery in refinery runs could allow global supply to alleviate high margins.

• Long European Natural Gas Positions

  Goldman Sachs continues to view them as attractive geopolitical hedges.

  Strengths

  Together with forward diesel calendar spreads, they provide the geopolitical risk exposure described in the report.

  Weaknesses

  The report does not provide a standalone natural gas valuation or price target.

  Comparison

  Listed alongside European diesel forward calendar spreads, although the report's quantitative analysis focuses primarily on refinery runs and diesel margins.

Key data

• Global Refinery RunsDown nearly 7mb/d year over yearGlobal supply has still failed to recover even with margins near record highs
• Global Refining Capacity OfflineNearly 10mb/dLarge-scale capacity outages place a ceiling on runs
• Global Product MarginsUp approximately $30/bbl year over yearHave continued to rise over the past two months
• US Diesel MarginsAbove $100/bblAt a record high and above the crude oil price
• Middle Eastern Refinery Outages Versus Seasonal NormsApproximately 2mb/d higherIncludes the attack on Saudi Arabia's 0.4mb/d Jazan refinery and ongoing repairs at other refineries
• Russian Refinery Outages Versus Seasonal NormsApproximately 3mb/d higherCaused by continued drone attacks
• Middle Eastern and Russian Refinery Operating LevelsApproximately 60% of capacity eachUtilization since August is down 18-20 percentage points year over year
• US Refinery UtilizationApproximately 97%Average year-to-date utilization has risen by 3 percentage points, leaving limited scope for further production increases
• Chinese Refinery UtilizationApproximately 66%Affected by export quotas, moderate domestic demand, and alternative modes of transportation
• Historical Impact of Margins on Next-Month RunsEvery $10/bbl increase in margins raises next-month runs by 0.6-0.8mb/dMargins are based on the average of US gasoline and diesel margins
• One-Month Impact of a Sustained Decline in RunsA 1mb/d decline in runs reduces US diesel margins by $0.7/bblThe short-term fair-value impact of lower refinery utilization
• 12-Month Impact of a Sustained Decline in RunsA 1mb/d decline in runs raises US diesel margins by $6/bblThe inventory-decline effect dominates, equivalent to approximately 27% based on the sample since 2010
• Impact of Outages on Global RunsA 1mb/d increase in outages reduces runs by approximately 0.6mb/dThe chart summary range is 0.5-0.6mb/d, as increased throughput at unaffected refineries offsets part of the shock
• Impact of Outages on Diesel Margins After 12 MonthsA 1mb/d increase in outages raises fair value by $3/bblEquivalent to approximately 14% based on the sample since 2010
• New Refining CapacityApproximately 0.5mb/d over the next 12 monthsFrom India and the Middle East; insufficient to offset existing outages if attacks persist
• Dec26-March27 European Diesel Forward Calendar SpreadUp more than 30% since late JulyExpected to have a further 50%-60% upside under a persistent-outage scenario

Impact & implications

The report argues that damage to refining capacity prevents high margins from being rapidly converted into additional supply, meaning the global product market will rebalance more through inventory drawdowns and high prices. In the short term, lower runs may slightly reduce fair-value margins through lower utilization, but as inventories are depleted, the net 12-month impact turns clearly positive. Persistent outages therefore provide stronger support for forward diesel margins than their initial impact on spot-model fair value.

Risks

• If geopolitical tensions in the Middle East and Russia ease and refinery outages decline, refinery runs and global product supply will recover, potentially weakening support for high margins and diesel forward calendar spreads.
• Approximately 0.5mb/d of new refining capacity in India and the Middle East over the next 12 months will alleviate some supply constraints, although the report believes this addition will be insufficient to offset existing outages if attacks persist.
• US refineries' postponement of planned maintenance could increase the risk of subsequent unplanned outages, further constraining global effective refining capacity.

What to watch

• Track attacks on refineries in the Middle East and Russia, repair progress, and whether outage volumes decline from their current elevated levels.
• Monitor whether US refinery utilization, currently as high as approximately 97%, can rise further and whether postponed maintenance results in new unplanned outages.
• Watch the pace of global product inventory declines, as the inventory effect determines the extent to which the impact of low runs on margins shifts from negative in the short term to positive over the medium term.
• Monitor China's product export quota policy and whether the export rebound merely represents normalization following the sharp second-quarter decline.
• Track the commissioning progress of approximately 0.5mb/d of new refining capacity in India and the Middle East over the next 12 months.
• Monitor changes in the Dec26-March27 European diesel forward calendar spread under persistent-outage or geopolitical-de-escalation scenarios.