Veriton Investment

Fuel Prices Jump More Than Oil as Iran War Hits Supply

(Bloomberg) -- Fuel prices surged across global markets on Monday as the war in Iran disrupted shipments from Persian Gulf refineries.

In Europe, benchmark diesel futures jumped as much as 23% to a two-year high, outpacing gains in Brent crude. Outright prices for jet fuel, gasoline, high-sulfur fuel oil and naphtha — a petroleum product used as a petrochemical feedstock and to make road fuel — also soared.

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Tanker traffic through the Strait of Hormuz — a critical artery for more than four million barrels a day of petroleum products — has effectively halted. Meanwhile, Saudi Aramco stopped operations at Ras Tanura, the kingdom’s largest refinery, following a drone strike in the area.

Missile debris also fell on the Al-Ahmadi refinery in Kuwait, injuring two workers, but operations and production were not disrupted.

“Losing access to 4.3 million barrels a day of refined product exports from the Persian Gulf will give all refinery margins outside of the Persian Gulf a boost,” said Eugene Lindell, head of refined products at consultancy FGE NexantECA. “Refineries focusing on the middle of the barrel will benefit more than those focused on gasoline, given limited gasoline exports out of the Persian Gulf.”

In addition to being major crude exporters, countries such as Saudi Arabia, the United Arab Emirates and Kuwait operate refineries that produce large volumes of diesel, naphtha and other petroleum products for export worldwide.

Product shipments through the Strait of Hormuz are dominated by liquefied petroleum gas and naphtha. Diesel flows are also significant, while gasoline and jet fuel volumes are comparatively smaller.

In Europe, the premium of jet fuel to crude oil — known as the crack spread — has also surged, reaching its highest level since the summer of 2023.

“Cracks are up on risk alone at the moment,” said Neil Crosby, head of research at Sparta. The “Ras Tanura shutdown is not only a problem from immediate oil product flow/outages, but also evidence of escalation to oil infrastructure.”

In East Asia — a key destination for Persian Gulf supplies — the premium of naphtha relative to northwest Europe has climbed to its highest level since at least early 2023.

Margins for high-sulfur fuel oil, a refining byproduct used as ship fuel and power-generation feedstock, have risen more modestly than diesel margins in Europe.

In the US, the gasoline crack spread — the premium of gasoline to crude — fell on the day. Shipments of the motor fuel through the Strait of Hormuz are relatively limited.

The structure of forward prices also shows how traders are reacting to the export disruption. In European diesel futures, the premium of fuel for prompt delivery versus later dates is surging, a structure known as backwardation that typically signals tight supply. It’s a similar picture in high-sulfur fuel oil and jet fuel markets.

(Updates with more information throughout.)