"It's Pretty Tight": Vitol Chief Warns Of Global Fuel Squeeze As Refineries Max Out, Leaving Little Room For More Chaos

Geopolitical risks in the Gulf pushed Brent crude futures toward $100 a barrel overnight as Yemen's Iranian-backed Houthi rebels launched new attacks on Saudi cities and economic infrastructure.

At 7:45 a.m. ET, the US diesel crack spread remained above $101 a barrel as severe tightness across the world's refined-product markets continued, with a late-summer squeeze threatening to extend into fall and winter (twin crisis for Europe). 

Notably, the global industrial economy runs on usable fuels, particularly diesel, making refinery output and product availability super critical. Persistent disruptions through the Strait of Hormuz, Russian energy export restrictions, and Ukrainian drone strikes on Russian refineries have compounded the squeeze into crisis territory, leaving fuel markets vulnerable to further supply shocks.

Vitol CEO Russell Hardy was quoted by Bloomberg earlier today as saying the refined-product market is in turmoil.

Hardy, who runs one of the world's largest energy traders, said that even as recovering tanker shipments through the Hormuz chokepoint ease pressure on crude supply, limited refining capacity leaves little room for further disruptions.

"It's pretty, pretty tight and inflexible out there as far as the market is concerned," Hardy told an industry conference in Singapore on Tuesday. He noted that product stockpiles are near their lows and continue to slide. 

Hardy warned that global oil-product stockpiles are "still drawing," adding, "We're still not running enough refining capacity to prevent those draws, and we keep eating into the surplus that exists around the world."

The strain is particularly visible in the US. Just go to any gas station, and you can see the wide gap between 87-octane gasoline and diesel prices. Last week, diesel prices hit a record high nationwide.

Also in the US, distillate inventories, including diesel, are at their lowest seasonal level in at least 25 years despite high refinery utilization.

In Europe, gasoil futures have more than doubled this year, while Brent rose as much as 2.3% on Tuesday to $99.20 a barrel.

Vitol estimates Hormuz tanker flows stand around 10 million barrels a day, but Hardy cautioned that this volume "isn't guaranteed to get out every day." He said, "It depends on ships, it depends on insurance, it depends on captains and crew being in to do that difficult job."

However, Goldman commodities strategist Yulia Zhestkova Grigsby and her team wrote in a note last week (read here) that Hormuz tanker flows were between 15 million and 16 million barrels per day, accounting for ships that switch off their Automatic Identification Systems to avoid detection by Iran.

Also at the conference, Mark Senn, senior vice president of global trading at US processor Phillips 66, warned, "We came into this shock with very little flex" in the refining system, adding that the US system is running at full capacity.