The Middle East conflict overshadows outages in Russia and a 'massive impact' on diesel supplies

Ukraine's attacks on Russian refineries have been a major factor in the rising diesel and gasoline retail prices squeezing U.S. budgets even more this summer.

Thousands of miles away from the Middle East, another war has entered a difficult new chapter, carrying threats to the global economy that go well beyond diesel and other fuels.

The conflict between Russia and Ukraine, two major exporters of grains and, in the case of Russia, fuels, has intensified. Russia has carried out deadly, regular strikes on Kyiv in recent weeks, and Ukraine has assailed Russia's energy infrastructure with more precision - and is extracting maximum damage.

That has been a major factor in the rising diesel and gasoline retail prices that have squeezed American budgets even more this summer, stoking fears of inflation.

It's not just fuels, however - attacks on Black Sea grain terminals threaten exports of vital foodstuffs, including wheat, with the northern hemisphere's harvest season and winter around the corner and with Middle East fertilizer still out of reach. And, like the U.S. war with Iran and conflict in the Middle East, there's little hope that a lasting ceasefire could be achieved soon.

"I am looking at how this is evolving and I feel really terrified," said Tatiana Mitrova, a fellow at Columbia University's Center on Global Energy Policy and a former board member at oilfield-services giant SLB $(SLB)$.

There are plenty of reasons to worry. Amid the intensifying Russia-Ukraine conflict, the Trump administration sent Jared Kushner and Steve Witkoff on visits to Moscow and Kyiv over the weekend, but there were no breakthroughs.

Russia has a ban on diesel exports, taking offline roughly 800,000 barrels a day of the fuel's exports that supplied mainly Turkey, Brazil and some African countries, where Russian products are not under sanctions. That sent these nations scrambling, and, in a domino effect, left Europe's diesel stockpiles dangerously low and the U.S. stepping in to fill that breach.

That's good news for U.S. refiners such as Marathon Petroleum (MPC) and Valero Energy $(VLO)$, whose quarterly profits have skyrocketed and whose shares hit a string of record highs in recent sessions. But that's not so good news for the U.S. economy, which relies on the health of its consumers, and for global markets.

"The Middle East crisis has overshadowed the outages in Russia and the massive impact that's having on diesel supply globally," said Debnil Chowdhury, head of Americas and Europe refining and marketing for S&P Global Energy.

Diesel, in turn, is overshadowed by gasoline in the public conversation, but "is really the workhorse fuel," he said.

When the price of diesel rises, it doesn't show up immediately in consumers' pocketbooks, Chowdhury said. Instead, it has a compounded effect, one that will make its way through the economy over the next three to six months, he said.

"This is something that we're watching very closely that might actually translate into weaker economic growth" for the rest of 2026 and into next year, Chowdhury added. "It leaves us in a precarious situation."

Analysts at data platform Kpler estimate that global oil-refinery capacity, which includes diesel and gasoline refining, is running at around 80 million barrels of fuels a day, down from a more typical 86 million barrels a day for this time of the year.

To add to the problem, recent flare-ups in the Middle East conflict have hit Saudi Arabia's refineries and other energy facilities. Russia's refining capacity is about 40% offline.

"Even if you had the crude oil, the Strait of Hormuz was not constrained, and, say, everything was back to normal, you can't turn it into product," said Al Salazar, an energy analyst and director at Enverus Intelligence Research. "Nobody consumes crude oil," but rather the fuels that come from it, he said.

On Thursday, another jump for crude futures dragged down stocks and bonds, with London-traded Brent futures (BRN00) topping $107 a barrel and New York-traded WTI (CL00) surpassing $102 a barrel, each looking at gains of nearly 80% so far this year. Wheat futures (W00) have gained more than 46% in the year, with roughly half of such gains coming in the last three months.

Far-reaching attacks - and consequences

Ukraine began its drone campaign against Russian refineries and energy infrastructure about a year ago, but it has since fine-tuned the attacks, which are now more damaging, Columbia's Mitrova said.

On Wednesday, drone attacks caused a fire in natural-gas facilities by the city of Novy Urengoy, nearly 4,000 miles east of Moscow and deep into northern Siberia.

Besides being farther reaching, the drone attacks are coming in bigger waves, overwhelming Russian defenses, and in some cases Ukraine is targeting refineries it already hit before, complicating repairs and putting the refineries offline for longer periods.

Recent attacks also seem calibrated to target the facilities' most expensive and most difficult-to-replace components, making repairs take even longer, Mitrova said.

"They'll keep fixing stuff and Ukraine will keep destroying it, it will be just a race," she said.

In Russia, a fuel crisis is already "very visible," with lines at fueling stations, some rationing, and fuel prices officially about 16% higher so far this year - but much more expensive in the black market, if it's even available, she said.

There's some hope that both countries would agree on a temporary ceasefire on energy infrastructure, but the approach of winter is likely to make matters worse, particularly in Kyiv, Mitrova said.

Then there's the threat on grain exports, mostly wheat, in the Black Sea. Russia has tried to redirect grain exports through its Baltic Sea corridor, but that's a fraction of its Black Sea exports, she said.

"Food security will be affected very, very badly with all the grain trapped inside the Black Sea, with neither Russia or Ukraine able to export, fertilizer not coming from the [Persian] Gulf," and weather phenomena such as the "super" El Nino affecting global agriculture, she said.

"It will become very visible next year," and it already is in emerging economies, she said.

-Claudia Assis