Oil gyrates on Hormuz headlines as depleted inventories and tight distillates raise the stakes

The real squeeze is in refined products

The strongest signal of tightness is arguably no longer crude itself but refined products, particularly middle distillates. Diesel, jet fuel and heating oil markets remain squeezed by disruptions in two critical refining regions. Middle Eastern crude and product exports remain constrained, while Ukrainian attacks continue to restrict Russian refinery operations.

The Gulf had developed into one of the world's most important export-oriented refining hubs before the war, exporting around 3.3 million barrels per day of refined products in 2025. The region is particularly important for diesel and jet fuel. Many of its sophisticated refineries are designed around medium and sour crude grades which, combined with complex upgrading capacity, are well suited to producing middle distillates. Medium-gravity crude naturally produces a higher proportion of diesel and kerosene than very light crude, making the loss of these barrels particularly difficult to replace.

The latest IEA report underlines the scale of the problem. Global refinery crude throughputs reached 80.9 million barrels per day in July but remained almost 5 million barrels per day below year-earlier levels. Diesel exports from Russia, the Middle East and Asia were down 1.3 million barrels per day year-on-year, equivalent to around 20% of global seaborne diesel trade, while jet fuel exports from the same regions fell by roughly 670,000 barrels per day, or 34% of global trade.

The accompanying charts tell the story clearly: distillate cracks have surged well above gasoline margins across the US, Europe and Asia, while the NYMEX 3-2-1 crack has climbed to exceptionally elevated levels.

For refiners that can secure crude and maintain high utilisation, the economics are therefore extraordinary. Marathon Petroleum reported second-quarter refining and marketing EBITDA of USD 6.7 billion versus USD 1.9 billion a year earlier, with its refining margin more than doubling to USD 36.33 per barrel. Major refiners including Sinopec, Saudi Aramco, ExxonMobil, Marathon Petroleum and Valero are obvious beneficiaries, with Marathon and Valero shares having roughly doubled year-to-date as investors price the improvement in refining economics.

Backwardation delivers another windfall

Another often overlooked feature of this year's energy rally has been the return generated through the futures curve, where persistent backwardation has significantly boosted performance for long positions. In a backwardated market, near-term contracts trade at a premium to later-dated ones, meaning that as positions are rolled forward investors are effectively selling higher-priced expiring contracts and buying cheaper deferred ones. This creates a positive roll yield that adds to spot price gains, amplifying total returns even in periods when outright price moves are relatively modest.

The accompanying Bloomberg/Saxo data show Brent gaining 46.6% on the first futures contract while delivering a total return of 75.7%. WTI shows an almost identical divergence, with a 45.5% prompt-month gain translating into a 75.4% total return. The difference is even more dramatic in distillates, with gasoil producing a 154.8% total return against a 98.4% gain in the first future, while ULSD has returned 140.4% versus a 100% prompt-contract advance.

Deep backwardation has therefore provided long-only investors with substantial positive roll yield on top of the directional price gain. Put differently, the shortage is being expressed not only through higher prices but also through the increasingly expensive premium attached to immediately available barrels.

Where next?

An eventual reopening of Hormuz would almost certainly trigger another sharp downward adjustment as traders price returning Gulf exports. But the subsequent move may prove more complicated.

Inventories have been heavily depleted, strategic reserves have been drawn down, Gulf production remains well below normal and the refining system has lost capacity precisely where the market needs it most. The IEA itself expects inventories to remain under pressure before the balance moves back towards surplus later this year.

That leaves crude caught between two powerful forces: expectations of future supply normalisation on one side and an increasingly depleted physical buffer on the other. Until the Strait actually reopens and production visibly recovers, volatility looks set to remain a defining feature - while distillates and the shape of the futures curve may continue to provide the clearest evidence of just how tight the underlying energy market has become.