The Iran War’s Toll on U.S. Fuel Markets

The escalation of the Iran war and the disruption of the Strait of Hormuz, where a fifth of the global oil supply flows, has triggered what the International Energy Agency called the largest supply crisis in history. Restoring lost Middle Eastern oil supply could take years, according to experts.

However, the blockade of this important artery has a more pronounced impact on Asia and Europe than on the United States, which sources less than 10% of its total 6 million bpd imports from the Middle East. Most of those imports are primarily from Saudi Arabia (4%) and Iraq (3%), according to Energy Information Administration (EIA) data.

Persian Gulf imports concentrate largely in the U.S. West Coast because California refiners lack the pipeline connectivity of the U.S. Gulf Coast. Even when daily price swings from the Iran war can impact refiners in the West Coast more than in any other U.S. region, they can always opt for more cost-competitive supplies from Canada, Mexico, Colombia and even Venezuela. The EIA has reported that crude imports from Venezuela have steadily increased since January when the Trump Administration took over control of the country’s oil industry.

U.S. oil production also remains unaffected by the Middle East events at over 13 million bbl and its oil reserves are sufficient to compensate shortages in Asian and European markets. The story is different for refined products such as gasoline, diesel and jet fuel as some refineries are offline constrained by seasonal maintenance.

Uncertainty over the duration of the Iran war and crude’s potential entrenchment above $100 per barrel has heightened U.S. downstream volatility, pushing rack and spot prices to multi-year highs. Diesel is seeing the most significant increases by far, soaring nearly 40% since the start of the Iran conflict that has effectively shut in millions of bpd of global middle distillate supply. Seasonal factors are playing a key role in the diesel rally as the spring planting season boosts agricultural demand for distillates, while the spring refinery maintenance season ahead of peak summer driving demand further constrains supply. National average diesel prices have spiked to above $5 per gallon since mid-February.

Global diesel availability was already limited prior to the Iran war due to the sanctions affecting oil trade from Russia, Iran and Venezuela.

Meanwhile, U.S. gasoline prices at the pump soared 30% on average during the six weeks of the war, in line with the underlying futures market amid lower demand and ample supplies.

U.S. oil producers are expected to report strong first-quarter profits, driven by higher crude prices, while refiners are set to benefit from wider margins on diesel and jet fuel. The 3:2:1 crack spread used by U.S. refiners already has surpassed the 18-month highs reached in November.

Fuel sellers and buyers face mounting challenges as sharp daily price swings make procurement and hedging extremely difficult. Closely tracking weekly inventory reports from the EIA, alongside monitoring product availability at regional refineries and terminals, remains essential. Maintaining sufficient credit lines to replenish tank storage is also critical as market participants navigate the volatility caused by the Iran conflict.

For consumers, escalating fuel prices are set to drive up the cost of food, goods and transportation, adding to inflationary pressures.

As the Iran conflict continues to cast a dark cloud over global energy supplies, diesel and gasoline markets are unlikely to find relief in the near term, particularly due to seasonal demand pressures and constrained refining capacity.