Analysis: Refiner Cuts Likely Without Hormuz Reprieve

VIENNA (DTN) – Global refined fuels production and inventories may continue to decline just as demand reaches its seasonal peak this summer if the Middle East supply squeeze does not get resolved in time, suggesting possible shortages, further price hikes and consequential demand destruction.

Faith Birol, director of the international Energy Agency (IEA), warned this week that commercial crude oil inventories could only cover a few more weeks of current refiner demand, and said that the global market could hit a “red zone” by July or August.

Global oil inventories have been shrinking at an unprecedented pace since the U.S.-Israeli war on Iran has kept roughly a fifth of global petroleum liquid supply off the market since early March.

A lack of supply will force refiners to throttle runs, squeezing an already tight fuels market even further, raising the risk of price-induced fuels demand destruction and acute fuel shortages in some parts of the world.

The IEA, in its latest monthly oil market report, said that observed global inventories shrank at a pace of 4.16 million bpd in March and 3.9 million bpd in April. Balance estimates implied much steeper stock draws to the tune of 5.63 million bpd and 5.31 million bpd in these two months.

The true impact on stockpiles at some of the globe’s most important refining hubs situated in oil importing countries was masked by rapidly swelling inventories in the Middle East, where crude oil quickly backed up into every available storage option amid the near complete loss of export capacity.

Excluding these barrels which remain inaccessible to global refiners, the Paris-based energy watchdog estimates global oil stocks to have fallen at a rate of 6.2 million bpd since the start of the war.

Logistical constraint induced demand destruction feathered some of the impact the largest oil supply disruption in history has had on inventories. Global supply fell by 12.8 million bpd since the start of the war, but the sudden loss of their main crude oil stream forced refiners particularly in Asia to throttle runs.

Soaring operating costs, from crude oil to LNG to tanker rates, had refiners cut back further. In April, crude inputs in Chinese refineries plunged to the lowest level since August 2022, when strict COVID-lockdowns stymied domestic fuel demand, official government data from the National Bureau of Statistics showed. Globally, the IEA expected refinery crude inputs to plunge by 4.5 million bpd in the second quarter of 2026.

High prices may stifle demand and incentivize more production down the line. But the global deficit is set to steepen in the immediate future should the Strait of Hormuz remain untraversable. The U.S. Energy Information Administration (EIA) estimated that the global balance flipped from a 3.81 million bpd surplus in the fourth quarter of 2025 to a 670,000-bpd deficit in the first quarter of this year, and forecast global petroleum liquids stocks to plunge by 8.47 million bpd in Q2.

Oil exports from the Persian Gulf may soon resume given U.S. efforts to reach a diplomatic solution with Iran over the Middle East conflict that seized up energy shipments in the Strait of Hormuz since early March.  But inventories are unlikely to experience immediate respite.

In fact, forecasts by both the IEA and EIA assume that flows will only gradually return from June. Given long voyage times, scarce dirty tanker availability in the region, and the scale and duration of production shut-ins, refiners in Asia are likely to continue drawing from stockpiles for months and will be slow to resume operations at a pre-war pace.