Iran Conflict Disrupts Global Refining Balance; U.S. Refiners Benefit While Asia and Europe Face Pressure
AI summary card
Iran Conflict Disrupts Global Refining Balance; U.S. Refiners Benefit While Asia and Europe Face Pressure
Due to the Iran conflict and Russian drone strikes, over 12 million barrels per day (bpd) of global refining capacity is offline, leading to significantly tighter supply-demand balances in 2026–2027. The report is bullish on U.S. refiners and bearish on Asian and select European names.
- Global offline refining capacity may have exceeded 12 million bpd, primarily due to the Iran conflict and Russian attacks.
- The global refining balance sheet is expected to tighten substantially in 2026 and 2027, with impacts lasting into 2027.
- U.S. refiners (e.g., Marathon Petroleum, Valero) are clear beneficiaries; Asian refiners (e.g., HPCL, Sinopec Shanghai Petrochemical) are in the worst position.
- European refining margins have become more volatile, with April composite margins falling to $21.0/bbl, though they remain elevated due to geopolitical risks.
- China retains spare capacity but prioritizes domestic supply; May clean fuel export quotas saw only a modest increase.
Report interpretation
Overview
This report, published by UBS Evidence Lab, tracks global refinery project progress using satellite imagery and focuses on the profound impact of the Iran conflict and Russian drone strikes on the global refining balance sheet. The core conclusion is that the global refining market will face substantial tightening in 2026–2027, with offline capacity reaching 12 million bpd. Under this scenario, refiners across regions experience starkly divergent outcomes: U.S. refiners emerge as clear winners due to advantaged feedstock access and favorable regulatory conditions, while Asian refiners suffer from Middle East crude dependency and rapid run cuts, and Europe faces policy intervention risks.
Core views
Significantly Tighter Supply-Demand Balance: The report estimates that over 3.5 million bpd of refining capacity in the Gulf Cooperation Council (GCC) region has been shut down due to the Iran conflict, with more than 2 million bpd potentially damaged and requiring repairs. Combined with approximately 0.7 million bpd affected by recent Russian drone strikes and unplanned outages in Australia and the U.S., total global offline refining capacity may exceed 12 million bpd. Even if Strait of Hormuz flows resume shortly, the drawdown of inventory buffers and demand destruction effects will persist into 2027. Regional Divergence and Stock Selection: U.S. refiners are seen as clear beneficiaries in the current environment. The report maintains 'Buy' ratings on Marathon Petroleum and Valero for their ability to capture high margins. In contrast, Asian refiners are in the weakest position, rapidly cutting runs due to feedstock shortages, leading to 'Sell' ratings on HPCL and Sinopec Shanghai Petrochemical. In Europe, despite high refining margins, the risk of government intervention and windfall taxes tempers enthusiasm; only Neste is preferred, benefiting from both rising diesel prices and supportive biofuel regulations. Project Tracking and Delays: UBS Evidence Lab has updated its global refinery project database. India’s Barmer refinery (180 kbpd) has delayed startup to July due to a fire; IOCL Panipat’s expansion (200 kbpd) is pushed to year-end. Nigeria’s Dangote refinery plans a 750 kbpd expansion, but on-site activity remains limited. Additionally, the report has revised down its 2026 global oil demand forecast, now expecting flat year-over-year growth, with Q2 demand down 1.5 million bpd year-over-year. Margin Volatility and Inventories: After hitting new highs in March, refining margins showed mixed trends in April. European composite refining margins fell from $26.6/bbl in March to $21.0/bbl in April, mainly due to widening futures-spot spreads. With inventories depleting rapidly—particularly jet fuel stocks in Europe’s ARA region, which have hit their lowest levels since 2020—underlying refining margins are expected to remain elevated.
Analysis framework
The report combines a top-down macro supply-demand balance analysis with bottom-up micro-level project tracking. First, it quantifies refining capacity losses (in kbpd) from geopolitical events (Iran, Russia) to assess the global supply gap. Second, it uses UBS Evidence Lab’s satellite data and high-frequency logistics data (e.g., Kpler) to monitor real-time progress, utilization rates, and inventory changes at major refineries worldwide. Finally, it incorporates regional regulatory policies, feedstock access, and demand elasticity to assign differentiated valuations and ratings to refiners. This approach emphasizes that physical market constraints (e.g., inventories, logistics) outweigh theoretical balance sheets during extreme events.
Methodology notes
Supply-Demand Framework
The report rebalances the global refining market by calculating capacity losses (supply side) and demand destruction (demand side) caused by conflicts, assessing the sustainability of high prices and margins—a core analytical logic for cyclical and resource-based industries.
Refining Margin (Crack Spread) Analysis
The report closely monitors changes in refining margins (e.g., European composite margins), a key profitability indicator for refiners that reflects the spread between crude costs and refined product prices.
Event-Driven Analysis
The report treats sudden geopolitical events—such as the Iran conflict and drone strikes—as primary drivers, analyzing their immediate and long-term impacts on supply chain disruptions and market sentiment.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Marathon Petroleum (MPC.US)Beneficiary
- Strengths
- U.S. refiner with strong ability to capture high refining margins and secure feedstock
- Comparison
- Superior to European and Asian peers
- Valero (VLO.US)Beneficiary
- Strengths
- U.S. refiner benefiting from high margins and stable regulatory environment
- Comparison
- Superior to European and Asian peers
- Neste (NESTE.FH)Beneficiary
- Strengths
- Benefits from rising diesel prices and stronger biofuel regulatory support
- Comparison
- Top pick in Europe
- Risks
- Government intervention risk
- HPCL (HPCL.IN)Adversely Affected
- Weaknesses
- Asian refiner in the weakest position; rapidly cutting runs due to Middle East crude dependency
- Comparison
- Least preferred
- Risks
- Feedstock shortage, demand decline
- Sinopec Shanghai Petchem - A (600688.CH)Adversely Affected
- Weaknesses
- Asian refiner facing surging feedstock and logistics costs
- Comparison
- Least preferred
- Risks
- Feedstock shortage, demand decline
Key data
- Global Offline Refining Capacity>12 million bpdIncludes GCC shutdowns, Russian strike damage, and other unplanned outages
- GCC Shutdown Capacity>3.5 million bpdOf which >2 million bpd may be damaged and require repairs
- Russian Affected Capacity~0.7 million bpdDue to drone strikes in the past two weeks
- European April Composite Refining Margin$21.0/bblDown from $26.6/bbl in March
- 2026 Global Oil Demand ForecastFlat YoYPreviously forecast +0.8 million bpd; Q2 YoY decline of 1.5 million bpd
- Barmer Refinery Startup DateJuly 2026Delayed from H1 due to fire
Impact & implications
The report argues that the global refining rebalancing will structurally impact different regions. For the U.S., refiners will continue benefiting from high-margin environments with minimal policy intervention risk. For Asia, heavy reliance on Middle Eastern crude and limited inventory buffers will exacerbate feedstock shortages and demand suppression, impairing profitability. For Europe, while short-term margins are attractive, rising political risks (e.g., windfall taxes) warrant caution. In the long term, prolonged conflict could further deplete inventories, potentially requiring deeper demand destruction to rebalance the market.
Risks
- Volatility in crude and refined product prices leading to unstable refining margins
- Geopolitical stability and conflict duration exceeding expectations
- Government intervention and windfall tax risks (especially in Europe)
- Unplanned outages (equipment failures, explosions, strikes, etc.)
- Demand destruction either weaker or stronger than expected
- Soaring logistics and energy costs
What to watch
- Restoration of Strait of Hormuz traffic flows
- Drawdown pace of global refining inventories (especially Europe’s ARA and Singapore)
- Resolution progress of the Iran conflict and GCC capacity repair timelines
- Government policy responses to high oil prices (e.g., price caps, export restrictions)
- Actual commissioning progress of new refining projects (e.g., Dangote expansion, Indian projects)