The significant disruption to shipping through the Strait of Hormuz is having a more pronounced impact on the refined products market than on the crude oil market, leading to expectations that refining margins will remain substantially elevated throughout 2026.

Refining margins are projected to stay at two to three times the average levels seen between 2013 and 2019 for the remainder of 2026. Specifically, diesel margins are forecast to be $19 to $26 per barrel higher than pre-conflict projections.

By the fourth quarter of 2026, diesel margins in the United States and Europe are expected to reach approximately $50 and $37 per barrel, respectively. Over the same period, gasoline margins are anticipated to be around $22 and $14 per barrel in those regions.

Looking ahead to 2027, average diesel margins in the US and Europe are projected to be $41 and $29 per barrel, respectively.

The global refining system is currently under significant strain due to multiple challenges. These include approximately 2.5 million barrels per day of war-related refining capacity being offline in the Middle East, a suboptimal crude supply mix, and ongoing attacks on Russian refining infrastructure.

Global exports of refined products have decreased by about 4 million barrels per day year-over-year, driven by reduced exports from the Persian Gulf and lower output from Asian refineries.

Stalled peace negotiations between the US and Iran have prevented a return to normal traffic through the Strait of Hormuz. Recent reports indicate Iran's negotiation team has paused indirect talks with the US, citing Israel's continued military actions in Lebanon. Iranian officials have stated that negotiations will not proceed until Israel halts its military operations in Lebanon and Gaza and withdraws from Lebanon.

An Iranian foreign ministry spokesperson previously noted that talks with the US are conducted in an atmosphere of deep suspicion and mistrust, with the US frequently shifting its position and making new or contradictory demands, which has naturally delayed the process.

Furthermore, Iranian media has reported that Iran and allied "resistance axis" forces are planning a complete blockade of the Strait of Hormuz and may initiate actions in other strategic areas, such as the Bab el-Mandeb Strait.

The Bab el-Mandeb Strait, a crucial chokepoint connecting the Red Sea and the Gulf of Aden, is controlled by Yemen's Houthi forces. Prior to the outbreak of conflict, about 12% of globally traded crude oil transited this waterway. A simultaneous blockade of both the Strait of Hormuz and the Bab el-Mandeb Strait would severely exacerbate tight global oil supplies and push crude and product prices even higher.

However, recent comments from the US President have provided some relief to market concerns. He stated in an interview that he believes an agreement with Iran to extend a ceasefire and reopen the Strait of Hormuz could be reached "within the next week." He acknowledged a recent "hiccup" related to Iran's dissatisfaction with Israeli actions in Lebanon but claimed to have mediated calls that led to an agreement to stop fighting.

This situation follows a warning in early May that global inventories for crude oil and refined products were declining at a record pace in May due to persistent supply disruptions from the prolonged Middle East conflict.

The core of the current shock to the refined products market lies in the Persian Gulf's structural importance to the global refining system. The region is a critical supplier of medium and heavy crude oils, which are the primary feedstocks for producing diesel, jet fuel, and fuel oil.

The near-total halt of shipping through the Strait of Hormuz has not only cut off crude flows but has directly impacted the global supply chain for refined products that depends on Middle Eastern refineries.

Even if a US-Iran deal to reopen the Strait materializes, it is anticipated that inventories for gasoline and, particularly, diesel will draw down further in the initial reopening phase, as demand is likely to recover faster than the supply of refined products.

With demand growth expected to outpace capacity expansion, global refinery utilization rates are forecast to rise near historical highs by the end of 2026.