International crude oil prices fell rapidly from a two-month high, influenced by expectations of easing tensions between the US and Iran. However, the core market contradiction has shifted: crude oil supply pressure has eased somewhat, while the supply and demand of refined oil products continues to tighten. Driven by multiple factors, including geopolitical conflicts, Russia's diesel export ban, and low global fuel oil inventories, refining margins in Europe and the US have repeatedly hit record highs. Crude oil futures are more driven by market sentiment, while refined oil product prices and crack spreads are the true indicators of energy supply risk. Asian refineries are facing delays in crude oil deliveries, and there is a risk of further tightening of refined oil product supply, which may continue to push up global inflationary pressures.

Market divergence: Crude oil prices fell, while refined oil prices remained strong.

This week, signs of easing tensions between the US and Iran pushed crude oil prices sharply lower, but a recurring pattern over the past five months has confirmed a clear divergence between crude oil and refined product prices. Last week, crude oil briefly surpassed $100 per barrel, yet refining margins not only did not shrink but continued to reach new highs. Global gasoline, diesel, and jet fuel supplies have remained tight for months, stemming from the dual geopolitical disturbances of the US-Iran conflict and the Russia-Ukraine conflict. Crude oil futures reflect market expectations, while refined product crack spreads and spot transactions directly reflect the actual supply and demand situation of refinery operations and global fuel logistics.

Recycling profits exploded across the board, with European and American markets breaking records one after another.

Escalating tensions in the Middle East, coupled with Russia's restrictions on diesel exports and continued depletion of global fuel inventories, have driven a significant increase in refined product profits, far exceeding the rise in crude oil prices. European diesel refining margins have surpassed $60 per barrel, and the premium of European gasoline over Brent crude has risen to $41 per barrel, a four-year high. In the US, the 3-2-1 crack spread, a measure of refinery profitability, reached a high of $64, breaking the 2022 record. RBN Energy analysis indicates that demand for refined products remains resilient, with price increases fully offsetting rising crude oil costs, allowing refineries to continue enjoying substantial profits. Despite US refineries operating at full capacity and record-high crude oil and refined product exports, it is still insufficient to fill the supply gap in the Middle East.

With inventories remaining low, Asian refineries are facing new supply constraints.

U.S. commercial crude oil inventories are 6% below their five-year average, while Cushing crude oil inventories and strategic petroleum reserves are at multi-year and forty-year lows, respectively. U.S. wholesale diesel futures rose 26% in July, directly reflecting the fuel shortage. Asian refineries were awaiting the arrival of Middle Eastern crude oil in August, but shipping disruptions in the Strait of Hormuz and the Bab el-Mandeb Strait have caused delays, hindering refinery production increase plans. Analysts predict that Asian refinery operating rates may decline by the end of August, further limiting the increase in refined oil product output.

Risk Warning: Continued tightness in refined oil products continues to drag down the global economy.

Agriculture and land freight are heavily reliant on diesel fuel, and tight supplies of refined oil products could easily push up overall inflation. Industry insiders consistently emphasize that the real bottleneck in the oil market lies not in crude oil, but in downstream refined oil products. International Energy Agency (IEA) Executive Director Fatih Birol warned that vigilance regarding energy security cannot be relaxed. Although IEA member countries hold over 1 billion barrels of strategic reserves, refinery output growth is not keeping pace with crude oil transportation volumes, resulting in a significantly tighter market for refined oil products such as diesel and gasoline compared to the crude oil market.

Summarize

Short-term geopolitical easing has led to a pullback in crude oil prices, but investors should not underestimate the medium- to long-term risks in the refined oil sector. Low global fuel oil inventories, export controls, and shipping bottlenecks are collectively supporting high refining margins. Asian refineries are facing delays in crude oil deliveries, potentially leading to further tightening of refined oil supply. While crude oil prices are more volatile due to market sentiment, the price spread between refined oil products and crude oil is a key indicator for assessing energy risks and inflation prospects. A persistently tight fuel oil market will exert upward pressure on the global economy and inflation in the long term.