Severe Global Refining Shortage Threatens to Keep Fuel Prices High Until 2027

The world is currently facing a severe shortage of refining capacity that could keep petrol, diesel, and jet fuel prices elevated well into 2027. This crisis persists even if the Strait of Hormuz reopens and millions of barrels of crude stranded by the war return to the market.

Extensive damage to refineries in the Gulf and Russia, combined with limited spare infrastructure elsewhere, has left insufficient capacity to turn crude into necessary fuels. This situation has created an unusual divergence between prices for crude and refined products.

Nikhil Agarwal, managing director of Globestar Energy, speaking at Energy Trading Week Middle East in Dubai on Wednesday, predicted "a steep, steep fall" in the first quarter of 2027. However, he noted that refining capacity will not recover quickly, pointing out that Bapco, GTL Qatar, and Russian refineries are gone and will take years to rebuild.

If the strait reopens, Mr Agarwal expects crude to sell off sharply while fuel markets remain constrained. He explained that while crude is in global surplus, the lack of available refining capacity prevents it from being processed and brought to market, creating a disparity between crude prices and finished derivatives.

Mahmoud Nabil, head of trading at Rabdan Petroleum Trading in Abu Dhabi, shares this outlook, expecting refining margins and fuel prices to remain elevated with no downturns in sight. He noted that industry players are running operations to try to reach full capacity across the Mediterranean, Europe, and Asia.

Bahrain's Bapco Energies previously declared force majeure following an attack on its 380,000-barrels-per-day Sitra refinery. Meanwhile, the 140,000-bpd Pearl gas-to-liquids plant—a QatarEnergy joint venture operated by Shell—halted operations after a strike on Qatar's Ras Laffan Industrial City.

These losses occurred when spare refining capacity was already heavily restricted. According to S&P Global Energy, global refinery runs are about 7.5 million bpd below July 2025 levels, and product exports from key suppliers have fallen by 30 percent, or about 4 million bpd, since the Iran conflict began.

S&P Global revised its second-half forecast for global refinery runs down to 80.1 million bpd, with most capacity outside Russia, the Middle East, and China already operating near multidecade highs. Middle East refinery runs are projected to average about 8 million bpd this year, which is 1.6 million bpd below 2025 levels.

This strain is particularly evident in Gulf fuel exports. Kpler data shows that Gulf states, which supplied up to 32 percent of the world's jet fuel before the war, saw that share drop to 8.2 percent in March and 3.7 percent in April. Jet fuel exports through the Strait of Hormuz and Bab Al Mandeb strait plummeted more than 90 percent by April, saw a brief recovery to about half of prewar volumes in June, and dropped again to 68,000 bpd in August, which is 88 percent below February's 574,000 bpd.

Liquefied petroleum gas faced a similar shock, with exports through Hormuz dropping about 80 percent in March to roughly 300,000 bpd from an average of 1.5 million bpd in 2025, according to the International Energy Agency. This forced Asian buyers to rely increasingly on US cargoes.

In addition, Russian refineries have suffered damage from increased Ukrainian drone strikes in recent months. Mr Agarwal estimated that product runs have fallen from 5.5 million bpd to about 3.5 million bpd, impacting roughly 35 percent of the system. Although Moscow banned diesel exports on July 8, removing about a tenth of waterborne supply, S&P Global noted that exports had already dropped by about 500,000 bpd prior to the ban, indicating that refinery damage rather than policy was the primary driver.

This shifting supply dynamic is reshaping global trade routes. Mr Nabil observed that US fuel is being pulled toward West and East Africa, while higher prices in the Mediterranean draw cargoes away from Asia.

The capacity losses are directly reflected in fuel prices. Gasoline, diesel, and jet fuel are currently trading between $130 and $170 a barrel, and the US Gulf Coast diesel crack rose above $100 a barrel in August. Mr Agarwal highlighted that refineries worldwide are highly profitable with widening cracks, driven largely by maximum margins on gasoline due to acute shortages from China and Russia.

For traders, these disruptions are fundamentally changing how fuel is priced and transported as conventional routes grow less reliable. Mr Nabil emphasized the need for innovation in logistics and pricing methodologies to incorporate greater optionality.