A shortage of fuel oil used in ships and power plants is looming during the third quarter, with refineries exposed to increasing pressure due to wars that have disrupted crude refining operations and tanker movement, prompting them to give priority to the production of diesel and other petroleum products at the expense of fuel oil.
While crude oil prices have avoided major jumps in recent months, prices for refined products have risen sharply, with refineries in Russia and the Middle East damaged by attacks, and tanker traffic choked by restrictions on navigation. China also reduced refining capacities and exports of petroleum products to avoid depleting its reserves.
Tight supplies threaten to increase costs for shipowners and power generation companies, which are already facing the fallout from war-related disruptions. An increase in the cost of bunker fuel may in turn lead to higher freight rates.
Asia is the most affected
Asia is expected to be the most affected, given its heavy dependence on Gulf supplies that were disrupted by the war with Iran.
Singapore, the largest global center for bunkering, imports more than half of its needs, amounting to about one million barrels per day, according to import data from Kpler. Rystad Consulting expects a similar path.
Energy Aspects expected the deficit in the fuel oil market to reach about 218 thousand barrels per day during the third quarter, which is the first deficit the company expects since the third quarter of 2025, when the deficit was marginal at 6 thousand barrels per day.
Valerie Panobbio, an analyst at Rystad, told Reuters: “Due to the continued supply disruptions in the Middle East, we expect fuel oil supplies to remain very tight during the third quarter.”
Fuel oil joins gasoline, diesel and jet fuel, all of which are having difficulty keeping up with demand. Diesel prices in the United States reached record levels on Friday, with renewed hostilities between the United States and Iran, along with Ukrainian attacks on Russian refineries, leading to further supply disruptions.
Refineries prefer diesel and gasoline
The trend of refineries increasing production of some other products to benefit from higher profit margins has exacerbated pressures on the fuel oil market.
For example, the Nigerian Dangote refinery, with a capacity of 650,000 barrels per day, increased its exports of diesel, gasoline, and jet fuel, while its exports of fuel oil declined, according to Kpler data.
Dangote refinery and other refineries can use fuel oil as feedstock in secondary refining units to produce other types of fuel.
Royston Huan, an analyst at Energy Aspects, said that the record decline in gasoline and diesel stocks will motivate refineries around the world to increase the operation of secondary refining units, using more barrels of fuel oil as feedstock, which will further tighten the balance of the fuel oil market.
Independently owned gasoline stocks in the Amsterdam-Rotterdam-Antwerp hub reached their lowest level in nearly five years on August 27. Distillate inventories on the US East Coast, which include diesel, also fell to a record low during the week ending August 28.
Prices jump 76% in Singapore
Inventory levels and prices already reflect the pressures on the fuel oil market. Data collected by Reuters showed that stocks are about 30 percent below their three-year seasonal averages in major centers including Singapore, Amsterdam, Rotterdam, Antwerp and Fujairah.
Longer sea journeys, which ships are forced to avoid the Bab al-Mandab Strait or the Red Sea entirely due to threats launched by Houthi militants, also lead to an increase in demand for ship fuel, according to Panobbio.
The price of low-sulfur fuel oil, the main fuel used in ships, has jumped 76 percent since the outbreak of the war with Iran, to close to $825 per metric ton, or the equivalent of about $130 per barrel in Singapore, according to data from the Zero North ship fuel price platform on September 1.
This increase exceeds the rise in the price of Brent crude, which rose 40 percent during the same period.
Russian and Middle Eastern supplies decline
Ukrainian drone attacks on the production of Russian refineries were affected, as Russia’s exports of fuel oil fell in August to a record low of 591,000 barrels per day, compared to an average exceeding 860,000 barrels per day in 2025, according to Kpler data dating back to 2017.
In the Middle East, fuel oil exports declined by 45 percent on an annual basis to an average of 447 thousand barrels per day during the period from March to August, according to Kpler data.
Refinery disruptions in the Middle East included the Al-Zour refinery in Kuwait, which is a major exporter of fuel oil. Since March, the refinery has exported only one shipment amounting to 26 thousand barrels per day, compared to about 191 thousand barrels per day in January and February.
These developments indicate that the turmoil of war is putting increasing pressure on the markets for petroleum products, not just crude, with the possibility of the rise in the cost of ship fuel being transmitted to transportation and shipping prices if supplies continue to be scarce in the coming months.
Oil prices continued to gain during trading on Monday, in light of mounting fears of a long-term disruption in energy supplies from the Middle East, after the exchange of strikes between the United States and Iran and the targeting of ships and oil tankers in the Strait of Hormuz and other areas.
Brent crude futures rose 52 cents, or 0.54 percent, to $96.80 per barrel by 23:54 GMT, while US West Texas Intermediate crude rose 66 cents, or 0.72 percent, to $92.14 per barrel.
The new gains came after a strong week for oil, during which the price of Brent crude rose 7.8 percent, while West Texas Intermediate crude increased by about 10 percent, with the United States and Iran resuming their attacks, and the resulting decline in oil flows through the Strait of Hormuz, through which about a fifth of global oil supplies previously passed.
Targeting Iranian oil tankers
The US Central Command announced that US forces targeted, on Saturday, three Iranian oil tankers, including a tanker off Kharg Island, near one of the most important Iranian oil export centers.
On the other hand, the Iranian Revolutionary Guard Navy announced, on Saturday, the targeting of three oil tankers that were taking routes that it described as unauthorized in the Strait of Hormuz, in addition to three other American ships in different regions.
The maritime intelligence company, Marisk, said that Saturday's attacks represented a "major escalation in the maritime conflict," noting that commercial tankers were being deliberately used as tools of mutual economic pressure.
The company added that the developments have significantly weakened the distinction that previously existed between military confrontation and commercial shipping traffic.
Lowest shipping traffic since May
Concerns are increasing about shipping traffic in the strait, which represents a major corridor for global oil trade.
Data from Kpler Analytics showed that the average number of commodity ships that crossed the Strait of Hormuz during the past ten days amounted to about 10 ships per day, which is the lowest level since May.
In a new indication of the possibility of tightening restrictions on navigation, the Secretary of the Iranian Supreme National Security Council, Mohsen Rezaei, said on Sunday that Tehran will declare a prohibited zone outside the Strait of Hormuz in the coming days, according to what was reported by official media.
At the same time, OPEC Plus countries kept their oil production policy unchanged for the month of October, during a meeting held by the group on Sunday.
The group said in a statement that member states first need to agree on new production quotas before making decisions on next steps related to production levels.
The decision comes at a time when markets are closely monitoring the repercussions of military tension on supplies, especially with the decline in ship traffic in the Strait of Hormuz and the escalation of risks associated with commercial shipping.
Supply disruptions may extend into 2027
ANZ analysts believe that the most likely scenario at the current stage is the continuation of a state of confrontation between the United States and Iran, interspersed with calculated military operations, which may delay the return of oil supplies from the Middle East to normal levels.
Analysts said in a note that they expect oil exports to remain restricted through the remainder of 2026, before a gradual reopening begins late in the fourth quarter of the year.
They added that the return of oil flows to pre-war levels is not expected before the late first quarter or early second quarter of 2027, indicating that the impact of the current turmoil on energy markets may extend for a period longer than the duration of the military confrontation itself.
The dollar maintained limited movements during Monday's trading, despite rising bets on raising US interest rates, at a time when escalating tensions in the Middle East raised fears of expanding global inflationary pressures, which may push major central banks to tighten their monetary policies simultaneously.
The US currency was also subjected to additional pressure as a result of the shift in investor sentiment towards the yen, in addition to concerns related to increasing US debt and uncertainty about economic policies.
Currency movements were limited in early Asian trading, with US markets closed for a holiday, while the dollar faced difficulty in maintaining the short gains it achieved after the release of the strong US jobs report on Friday.
The euro rose marginally to $1.1618, while the British pound stabilized at approximately $1.3519. The dollar index, which measures the performance of the US currency against a basket of major currencies, fell 0.07 percent to 99.09 points, remaining close to its lowest level recently at 98.558 points.
Inflation decides the Fed’s decision
Traders raised their estimates of the possibility of the US Federal Reserve raising interest rates this month to about 57 percent, after the release of non-farm payrolls data, while attention is now turning to the inflation data scheduled to be released on Friday.
Elias Haddad, global head of market strategy at BBH, said that a high reading of the consumer price index “will almost decide the decision to raise interest in September, and support the strength of the US dollar,” while a lower-than-expected reading will strengthen the justifications for keeping interest rates unchanged, and expose the dollar to pressure as a result of repricing monetary policy expectations in a more accommodative direction.
He added that until the decision to raise interest rates in September is decided, he does not expect the dollar to record “new cyclical highs,” noting that the tightening of monetary policy by other major central banks limits the differences in monetary policies.
Oil increases pressure on central banks
Inflationary pressures resulting from the continued rise in oil prices constitute one of the main reasons supporting expectations of the European Central Bank raising interest rates to 2.75 percent on Thursday.
Futures also show a 75 percent chance of a further hike to 3 percent by December.
In Japan, markets are pricing in a 75 percent chance that the Bank of Japan will raise interest rates by a quarter of a percentage point during its meeting on September 18, while the odds of another hike by December are about 60 percent.
The yen continues to rise
The Japanese yen extended its gains, rising more than 0.2 percent to 155.88 yen against the dollar, supported by expectations that the Bank of Japan will raise interest rates this month.
The yen's gains came after an economic advisor to Japanese Prime Minister Sanae Takaichi expected a rise in interest rates during September.
The Japanese currency jumped by more than 2 percent last week, supported by a group of factors, including the decline in trading operations based on interest rate differences, and increasing expectations of returning capital to Japan, which would support the yen.
Eric Robertson, global head of research and chief strategist at Standard Chartered, said that trading operations based on interest rate differentials were among the best performing strategies at the macroeconomic level since the beginning of the year, despite the rise in global borrowing costs, but the “recent wave of yen strength” represents a potential threat to the continued superiority of this strategy.
He added that if the yen continues to rise, this may indicate that interest rate increases in Japan and the United States are starting to prompt investors to change their asset allocation.
Other currencies and Bitcoin
In other currency markets, the Australian dollar rose 0.12 percent to $0.7208, while the New Zealand dollar settled at $0.5880.
Bitcoin stabilized above the level of $80,000, and recorded $80,145.95 in the latest transactions, after the cryptocurrency received support in the recent period as investors tended to diversify their assets away from the dollar.
