Gulf Oil Export Hiccups Hinder Asian Fuel Production Recovery

Oil Rises to Highest Level Amid Renewed Supply Disruptions

Oil prices continued to rise, trading near six-week highs on Wednesday amid growing fears of renewed supply disruptions after US forces launched raids on Iranian military targets for the eleventh consecutive night, while oil tankers were forced to change course in the Red Sea after warnings from the Iran-backed Houthi militia.

Brent crude futures rose $1.84, or 2.0%, to $92.85 a barrel, their highest since June 11. US West Texas Intermediate crude rose $1.67, or 2%, to $86.01, its highest since June 12. The gains came after oil prices settled at five-week highs on Tuesday following US strikes on targets in southern and western Iran, while Iran attacked US facilities in Bahrain, Kuwait and Jordan. The US military said it began its latest strikes on Iran early Wednesday morning Tehran time. The US attacks came shortly after the Kuwaiti military announced its air defenses intercepted Iranian drones on Wednesday. The continued exchange of strikes raised fears of further disruptions to global energy supplies, after Yemen's Houthis, allied with Iran, opened a new front in the Iranian war by threatening to target ships carrying Saudi oil in the Bab al-Mandab strait, and declaring a naval blockade on the strait's supplies. The Bab al-Mandab waterway, at the southern entrance to the Red Sea, has become an increasingly important route for Saudi crude oil exports, due to the sharp decline in traffic through the Strait of Hormuz since the collapse of the US-Iran ceasefire earlier this month.

Three oil tankers carrying Saudi crude oil bound for China and India changed course in the Red Sea on Tuesday, heading towards the Suez Canal instead of passing Yemeni waters, following a warning from the Iran-aligned Yemeni Houthi militia. Commodity strategists at ING bank said on Wednesday: 'This will force oil tankers to enter and exit the Red Sea via the Suez Canal, adding time and significant costs to voyages to Asia,' adding that tensions in the Black Sea are also exacerbating supply uncertainty.

The Caspian Pipeline Consortium stopped receiving oil from Kazakhstan after suspending shipping operations on Monday, following attacks on oil tankers at its Black Sea terminal, attributed to Ukrainian drones. ING said: 'The longer the suspension, the more likely Kazakhstan will have to cut its oil and gas production.'

Market sources said data from the American Petroleum Institute showed US crude oil and petroleum product inventories rose last week, while gasoline inventories fell. On Tuesday, three tankers carrying Saudi crude oil bound for China and India via Bab al-Mandab changed course, heading towards the Suez Canal. As a result, Asian refineries, which had arranged crude oil supplies for August, are preparing for delays in shipments from the Middle East, while refineries in the US and Europe are operating at near full capacity.

Meanwhile, Russia banned diesel exports due to Ukrainian drone attacks on its refineries, meaning global refined product supplies will remain limited, raising gasoline, diesel and jet fuel prices. High fuel prices have driven refinery margins to record levels in the US and Europe, and to two-month highs in Asia.

Neil Crosby, an analyst at Sparta Commodities, said: 'Margins are expected to remain high. Simply put, there is not enough production capacity in the world to deal with the double blow of the Strait of Hormuz closure and the Russian export ban. Prices must rise to curb end-user demand.'

For gasoil and jet fuel, Asian refinery margins jumped to over $65 a barrel, from just over $20 before the war. Globally, refineries were expected to run 81.6 million barrels per day in the third quarter, according to the International Energy Agency on July 10, up more than 4% from the second quarter, driven by a recovery in Asia, but still 4% lower than the previous year. In Asia, consultancy Wood Mackenzie forecast throughput at 30.37 million bpd in August, recovering from around 28 million bpd in May and June. But that recovery may stumble if shipments via the Strait of Hormuz decline further.

K Y Lin, chairman of Taiwan's Formosa Petrochemicals, a major exporter, said his company was planning to raise output to 480,000 barrels per day, about 90% of its capacity, in August.

Lin said: 'While Formosa Petrochemicals has secured crude oil supplies for arrival in August, the delivery and arrival of some of these cargoes remain uncertain at this time, given the renewed conflict in the Middle East.' He added: 'The flow of crude oil exports from the Strait of Hormuz is expected to continue, but these volumes are still far from pre-war levels.' Meanwhile, a Chinese refining executive said he expects some delays in July/August shipments, making it difficult to increase production. Global refinery run rates are expected to rise in the third quarter thanks to strong margins. China may help fill the fuel supply gap. Sumit Ritolia, an analyst at Kpler, said refineries in Asia, excluding China, are operating at between 93% and 95% of pre-war levels. In contrast, Chinese refinery run rates fell to just 58% of capacity in June. China has the most room to increase output and is less dependent on imported crude oil than others, given its large inventory to draw on.

Its refineries have kept production low due to weak domestic demand and fuel export restrictions. Beijing eased export restrictions for July, but it remains unclear whether the measure will extend into August.