Global refining bottleneck: Shifting from the Strait of Hormuz to Russia.

The bottleneck of the global oil market is shifting from the passage of crude oil through the Strait of Hormuz to the supply of refined oil products from Russian refineries. JPMorgan believes that the real challenge in pricing lies in whether the global supply of crude oil can be timely converted into diesel, gasoline, aviation fuel, and fuel oil. According to Wind Trading Platform, Natasha Kaneva, a global commodity researcher at JPMorgan, stated in the oil market weekly report on July 9 that "Hormuz is still primarily a crude oil story, but the next challenge for the market may increasingly be a refining story, and this clue leads to Russia." The bank's data shows that Russian refinery production in June dropped to 3.8 million barrels per day, a decrease of 1.5 million barrels per day compared to the beginning of the year, accounting for 20% of the global refinery production decrease of 8.2 million barrels per day this year. Recent policy actions also indicate that the pressure is shifting from refineries to domestic supply in Russia. According to CCTV News, on July 8 local time, Russian Deputy Prime Minister Novak stated that the government has implemented a ban on diesel exports and started importing oil products in July. Putin chaired a government video conference that day to discuss the operation of the fuel and transportation complex. For the market, this is not just a simple supply interruption, but a mismatch between crude oil and refined oil. More crude oil that Russia cannot process flows to export markets, putting pressure on the already loose crude oil end; reduced exports of diesel and fuel oil continue to support the fraction oil market and refinery profit margins. JPMorgan expects that while crude oil may become loose in the next two years, the gap in refined oil may continue. Hormuz remains a risk for crude oil, while refineries are the next bottleneck. JPMorgan divides the current oil market uncertainties into three lines: the extent of damage to Middle Eastern refinery facilities, the pace of recovery of Chinese refineries, and whether Russian refineries can withstand the ongoing drone attacks from Ukraine. All three are related to the supply of refined oil, but the bank believes that the risk of Russian refineries is easier to underestimate. The key to the Middle East issue is not just the flow of crude oil, but the availability of refining capacity. The refining capacity in the Middle East is about 11.7 million barrels per day, with over 30 attacks on refineries and oil processing facilities, but the extent of physical damage remains unclear. Under the benchmark assumption, about 250,000 barrels per day of refining capacity in the Middle East may still be shut down by the end of this year, but this estimate has a low level of confidence. China poses a different constraint. JPMorgan states that the decline in Chinese refinery production has reached 3 million barrels per day, with the core reason being more policy-related than refining profits. Even if Hormuz reopens, refineries may not immediately operate at full capacity. The more realistic path is to first confirm stability in flow rates, then relax the export quotas for refined oil, followed by increasing utilization rates and crude oil imports for state-owned large refineries. This process is expected to be difficult to complete before September. The decline in Russian refineries exacerbates the mismatch between crude oil and refined oil. The market impact of the issues with Russian refineries lies in the fact that it simultaneously changes the supply-demand structure at both ends of crude oil and refined oil. Russian refinery production in June dropped to 3.8 million barrels per day, a decrease of 1.5 million barrels per day compared to the beginning of the year. Currently, the production is about 3.6 million barrels per day, significantly lower than the normal processing capacity of about 5.3 million barrels per day. Under normal circumstances, Russian refineries can produce about 2 million barrels per day of diesel, 1 million barrels per day of gasoline, 900,000 barrels per day of fuel oil, 300,000 barrels per day of aviation fuel, and 1.1 million barrels per day of other refined oil products. Most of the domestic demand absorbs gasoline and aviation fuel, nearly half of the diesel production is for export, and almost all fuel oil is exported. This makes the market impact of the damage to Russian refineries on global refined oil trade greater than the impact on crude oil supply. Report data shows that Russia is the second-largest exporter of diesel globally, accounting for about 12% of global diesel exports, with a volume of about 800,000 barrels per day; it is also the largest exporter of fuel oil, with a share of about 16%, and a volume of about 900,000 barrels per day. The current decline in diesel and fuel oil exports accounts for two-thirds, making it one of the sources of sustained tightness in the global fraction oil market. Drone attacks are shifting towards more difficult-to-repair units. Russian refineries have been continuously subjected to drone attacks from Ukraine in the past three months. The damage has not only affected the refineries themselves but also includes storage tanks and an increasing number of secondary processing units that determine the yield of refined oil products, such as hydrocracking, catalytic cracking, and reforming units. These units are more complex than ordinary distillation units, and the repair cycle could lengthen from weeks to several quarters. According to CCTV News citing reports from the General Staff of the Armed Forces of Ukraine, on June 6, Ukrainian special forces launched an attack on the Okhtyrka oil refinery in Russia, resulting in explosions and a subsequent fire in the target area, the extent of damage is still being verified. It was reported by The Paper that the Okhtyrka refinery is the largest refinery in Russia, processing over 22 million tons of crude oil annually. According to The Paper citing sources from Reuters, the crude distillation unit CDU-10 at the Okhtyrka refinery caught fire and was damaged, accounting for about 38% of the factory's total capacity, with a daily production capacity of 24,580 tons. The report also stated that as the Okhtyrka refinery was attacked, only one of the top ten refineries in Russia located in the Irkutsk Region remained unaffected. Estimates of production capacity loss vary. The General Staff of the Ukrainian Armed Forces stated that as of early July, the attacks had paralyzed about 43% of Russia's oil refining capacity. The Paper cited Gary Peach, an analyst at the energy intelligence company Petroleum Market Analysis, as saying that in June, the amount of Russian crude oil processed into fuel fell by 25% year-on-year, to 3.95 million barrels per day, the lowest level in over 20 years; gasoline production dropped from 1.03 million barrels a year ago to 850,000 barrels. Export bans and imports show Moscow prioritizing supply stability. Russian policy responses indicate that their goal is to prioritize stabilizing domestic fuel supply. In addition to the diesel export ban, Russia has also begun importing gasoline from Belarus and India, encouraged higher gasoline production and blending ratios through tax adjustments, allowed refineries to produce and sell lower-grade Euro 3 gasoline, and tightened controls on exports of gasoline, aviation fuel, and diesel. According to CCTV News, Novak stated that the Russian government began importing oil products in July. Putin had previously acknowledged a "certain degree of fuel shortage" in Russia, but stated that the situation was "not serious," and said Russia would import more fuel and accelerate repairs to oil facilities. The report by The Paper stated that since late June, more than half of the federal subjects in Russia have implemented fuel rationing. Some regions limit fuel purchases to 20-30 liters per vehicle, prohibiting the public from purchasing fuel in barrels to prevent hoarding. The report mentioned that in some areas, waiting times at gas stations have reached up to 18 hours. The impact of fuel shortages is not limited to private car owners. Agriculture, public transportation, utilities, logistics, and small businesses are beginning to be affected. In August, the southern regions of Russia enter the harvesting season, where diesel demand typically peaks during the year, and the pressure on refined oil may further increase. Novak mentioned that Russia has sufficient fuel reserves, but panic buying has increased demand by 20% to 30%, leading to shortages at some gas stations due to logistics adjustments in distribution from refineries to oil depots and gas stations. Crude oil may loosen, but refined oil may not necessarily be cheaper. The supply-demand dynamics of crude oil present a split. By 2026, the average surplus on the crude oil end is +1.6 million barrels per day, while on the refined oil end, it is -1.3 million barrels per day, with a total surplus of only +0.3 million barrels per day. By 2027, the surplus on the crude oil end further expands to +4.6 million barrels per day, but the refined oil end remains at -1.2 million barrels per day. Price assumptions also reflect this structural mismatch. The average Brent price in 2026 is $85 per barrel, dropping to $63 per barrel in 2027; WTI prices drop from $80 per barrel in 2026 to $59 per barrel in 2027. Quarterly, Brent is expected to reach $98 per barrel in the second quarter of 2026, before falling and reaching $56 per barrel in the fourth quarter of 2027. The recovery of Russian refineries is not a quick process. JPMorgan's baseline path predicts that Russian refinery production will increase from the current 3.6 million barrels per day to about 4.5 million barrels per day by early 2027, with an average of about 4.7 million barrels per day for the full year of 2027. This path assumes that the intensity of drone strikes in Ukraine will ease after the September elections, before the winter heating season. Risks still exist on both ends. If drone attacks rapidly cease, a significant portion of Russia's refineries may recover their processing capacity within one to two months, alleviating the pressure on refined oil. However, if the attacks on secondary processing units and fuel distribution systems continue, the tightness in the refined oil market may last longer than in the crude oil market. For investors, the flow of crude oil is determined by Hormuz, while the gap in refined oil is determined by Russian refineries, making it a more challenging part of the oil market to trade. This article is reproduced from "Wall Street News". Editor at GMTEight: Jiang Yuanhua.