The Oil market’s real risk has moved north from Hormuz
- Crude and products are splitting apart. Russian refinery damage is pushing more crude into export markets while removing diesel and fuel oil from global supply.
- Russia is the downstream pressure point. The country accounts for roughly 20% of this year’s decline in global refinery runs and holds an outsized share of world diesel and fuel-oil exports.
- Complex refinery units are the real target. Damage to hydrocrackers and catalytic crackers can keep capacity offline for quarters rather than weeks.
- JPMorgan expects recovery, not normalization. Russian refinery runs are forecast to improve into 2027 but remain well below their pre-attack operating level.
- The trader’s expression is the crack, not necessarily crude. Product scarcity can sustain elevated refining margins even while the outright crude market remains adequately supplied.
The Oil market’s real risk has moved north from hormuz
The market is still watching the Strait of Hormuz, but JPMorgan argues that the more durable oil shock may now be developing nearly 2,000 miles farther north.
Hormuz remains the most visible pressure point in the crude market. The latest escalation between the United States and Iran has once again pushed tanker flows sharply lower, reversing much of the recovery seen over recent weeks. Yet after months of interruptions, traders have become increasingly comfortable treating crude supply as a fluid problem. Barrels can disappear quickly, but once shipping routes reopen, they can also return with surprising speed.
Refining is a different animal.
According to JPMorgan’s latest Oil Markets Weekly, led by global commodities strategist Natasha Kaneva, the critical question is no longer simply whether crude can move through Hormuz. It is whether the global refining system will be capable of processing those barrels once they return.
That distinction matters because the market may be moving toward an unusual split-screen outcome: plenty of crude looking for a home, but not enough functioning refinery capacity to turn it into diesel, gasoline, jet fuel and fuel oil.
JPMorgan identifies three large uncertainties hanging over the downstream system.
The first is the scale of damage to Middle Eastern refining and oil-processing infrastructure after months of conflict. The second is the timing of a policy-driven recovery in Chinese refinery activity. The third, and potentially the most important, is whether Russia can restore a refining network being repeatedly hit by Ukrainian drones...
Author
Stephen Innes
SPI Asset Management
With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.
