#Refiners Are Picking Winners, And Ships Are Losing
Crude oil has stayed relatively calm this year. Refined products have not. The Russia-Ukraine war and conflict in the Middle East have knocked out refining capacity and disrupted tanker traffic, and refiners responding to the damage are prioritizing production of diesel, gasoline and jet fuel, which carry fatter margins. Fuel oil, the heavy product used to power ships and some power plants, is being left behind.
The result is a fuel oil market heading into a serious deficit. Energy Aspects puts the third quarter shortfall at roughly 218,000 barrels a day, versus just 6,000 barrels a day a year earlier. Marine fuel stocks near major hubs sit about 30% below seasonal norms, and very low sulphur bunker prices in Singapore, the world's largest bunker hub, have jumped roughly 76%. Asia is most exposed because of its reliance on disrupted Gulf flows, while Singapore imports more than half of the fuel oil needed to meet its nearly 1 million barrels a day of demand.
#Where The Barrels Went Instead
The clearest example is diesel. US diesel prices climbed to a national record of about $5.90 a gallon this month, surpassing the previous high set in June 2022, while California climbed to a fresh record of $7.8256 a gallon on September 7, according to AAA, up from $7.8105 the day before. The national average is roughly 59% higher than a year ago, driven by Ukrainian drone strikes on Russian refineries, renewed US-Iran hostilities, and Moscow's diesel export ban through the end of September.
US refiners are among the beneficiaries of the global supply squeeze. Valero's chief operating officer, Gary Simmons, told analysts on the company's July 30 earnings call that the wars have taken roughly 5 million barrels a day of refining capacity offline worldwide. Phillips 66 executive Brian Mandell said on the refiner's August 5 call that refining fundamentals were “very tight and getting tighter” because of the disruptions in Russia and the Middle East. The outages have helped tighten refined-product markets and boost margins for US refiners.
Fuel oil supply has been squeezed from several directions at once. Russian fuel oil exports fell to a record low of 591,000 barrels a day in August, down from an average above 860,000 in 2025. Middle East fuel oil exports dropped 45% year on year to about 447,000 barrels a day between March and August, and Kuwait's Al Zour refinery has shipped almost nothing since March after averaging around 191,000 barrels a day in January and February. Nigeria's Dangote refinery has leaned the same way, ramping up diesel, gasoline and jet fuel exports while cutting back on fuel oil.
A sharper way to see the markets in just 5 minutes.
Same news, different lens. We cut through the noise and hand you the overlooked ideas and the deeper read the crowd misses. Join 38,000+ investors seeing the markets differently.
#The Costs Ripple Beyond The Refinery Gate
The knock-on effects reach well past fuel buyers. Higher bunker costs raise operating expenses for shipowners, and those costs tend to feed into freight rates, meaning higher shipping costs for whatever cargo those vessels carry. Power generators that burn fuel oil face the same squeeze. On the diesel side, trucking and harvest-season farming both run on the fuel, so record prices add to cost pressures across food and other goods. East Coast distillate inventories have fallen to a record low of 19.3 million barrels, a concern heading into winter given how many homes in the region rely on heating oil.
The open question is how long refiners keep favoring the higher margin products, and whether the wars driving this squeeze ease before Q4 maintenance season adds further strain. Unlike crude, there is no strategic reserve of refined fuels to cushion the gap.