Global Refining Bottlenecks: From the Strait of Hormuz to Russia

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The bottleneck in the global oil market is shifting from crude oil passage through the Strait of Hormuz to the supply of refined oil products from Russian refineries. JPMorgan believes that while crude oil can resume flowing, the real challenge in pricing lies in whether the world can convert crude into diesel, gasoline, jet fuel, and fuel oil in a timely manner.

According to Zhuifeng Trading Desk, Natasha Kaneva of JPMorgan Global Commodities Research said in her oil market weekly report on July 9, “Hormuz is still mainly a crude oil story, but the next challenge for the market may increasingly be a refining story, and this clue runs through Russia.” The bank’s data show that in June, Russian refinery runs dropped to 3.8 million barrels per day, down 1.5 million barrels per day since the start of the year, accounting for about 20% of this year's total global refinery run decline of 8.2 million barrels per day.

Recent policy actions also show pressure is being transmitted from refineries to domestic supply in Russia. According to CCTV News, on July 8 local time, Russian Deputy Prime Minister Novak said the government has implemented a diesel export ban and has begun importing oil products in July. Putin chaired a government video meeting the same day to discuss the operation of the fuel and transportation complex.

For the market, this is not simply a supply disruption, but a misalignment between crude oil and refined products. Crude oil that Russia cannot process is increasingly exported, putting downward pressure on an already loose crude market; diesel and fuel oil export reductions continue to support the distillate market and refining margins. JPMorgan expects crude oil may loosen over the next two years, but the product gap may persist.

Hormuz remains a crude oil risk, refineries are the next bottleneck

JPMorgan divides current oil market uncertainty into three lines: the extent of damage to Middle East refineries, the pace of China’s refinery run recovery, and whether Russian refineries can escape continued Ukrainian drone attacks. All three relate to product supply, but the bank believes Russian refinery risk is more easily underestimated.

The key Middle East issue is not just crude flows, but refining capacity usability. The Middle East has around 11.7 million barrels per day of refining capacity and has suffered more than 30 attacks on refinery and oil handling facilities, but the extent of physical damage remains unclear. Under the base case, about 250,000 barrels per day of Middle East refining capacity will still be offline by year-end, but confidence in this estimate is low.

China is another kind of constraint. JPMorgan says the decline in Chinese refinery runs has reached 3 million barrels per day, driven more by policy than by refining margin. Even if Hormuz reopens, refineries may not run at full capacity immediately. The more realistic path is to first ensure steady flows, then relax product export quotas, and have large state refiners raise utilization and crude imports. This process is unlikely to finish before September.

Russian refinery declines magnify crude vs. product mismatch

The market impact of Russian refinery issues is that it simultaneously alters supply-demand for both crude and refined products. Russian refinery throughput in June dropped to 3.8 million barrels per day, down 1.5 million barrels per day from the start of the year. Throughput is currently around 3.6 million barrels per day, well below the normal 5.3 million barrels per day processing scale.

Under normal circumstances, Russian refineries produce about 2 million barrels per day of diesel, 1 million barrels per day of gasoline, 900,000 barrels per day of fuel oil, 300,000 barrels per day of jet fuel, and 1.1 million barrels per day of other refined products. Domestic demand absorbs most gasoline and jet fuel, about half of diesel output is exported, and nearly all fuel oil is sold overseas.

This makes the impact of Russian refinery damage on global product trade greater than on crude oil supply. Reports show Russia is the world’s second-largest diesel exporter, accounting for about 12% of global diesel exports (about 800,000 barrels per day); it is also the largest fuel oil exporter, with about 16% share (about 900,000 barrels per day). Current diesel and fuel oil exports are down by about two-thirds, one of the reasons distillate markets remain tight globally.

Drone attacks shift to harder-to-repair facilities

Russian refineries have been hit by ongoing Ukrainian drone attacks over the past three months. Not only the refineries themselves were damaged, but also storage tanks and an increasing number of secondary processing units that determine product yields, such as hydrocrackers, catalytic crackers, and reformers. These devices are more complex than atmospheric and vacuum distillation units, and repair periods can stretch from several weeks to multiple quarters.

According to CCTV News citing the Ukrainian Armed Forces General Staff, Ukrainian special forces struck Omsk refinery on July 6, causing explosions and fire in the targeted area, with the extent of the damage still being verified. The Paper reported Omsk is Russia’s largest refinery, processing more than 22 million tons of crude per year.

The Paper, citing Reuters sources, reported the CDU-10 crude distillation unit at Omsk was damaged by fire, accounting for about 38% of the plant’s capacity, with a daily capacity of 24,580 tons. The Paper also said that with the attack on Omsk, of Russia's top ten refineries only Angarsk in Irkutsk Oblast has not been affected.

Estimations of capacity loss vary. According to the Ukrainian Armed Forces General Staff, as of early July, attacks have crippled about 43% of Russia’s oil refining capacity. The Paper cited oil market analyst Gary Peach from Energy Intelligence saying Russian crude processed into fuel in June fell 25% year-on-year to 3.95 million barrels per day, the lowest in over 20 years; gasoline output dropped from 1.03 million to 850,000 barrels per day from a year ago.

Export bans and imports show Moscow prioritizes supply stability

Russia’s policy response shows it aims to stabilize domestic fuel supply. In addition to the diesel export ban, Russia has begun importing gasoline from Belarus and India, incentivized higher gasoline output and blending through tax adjustments, allowed refineries to produce and sell lower-spec Euro 3 gasoline, and tightened controls on gasoline, jet fuel, and diesel exports.

According to CCTV News, Novak stated the Russian government started importing oil products in July. Putin previously acknowledged Russia has “a certain degree of fuel shortage” but called the situation “not critical,” and said Russia would import more fuel and speed up oil facility repairs.

The Paper said since late June, more than half of Russia’s 83 federal subjects have implemented fuel rationing. In some regions, each car is limited to 20-30 liters per purchase, and the use of fuel cans is banned to prevent hoarding. In some places, gas station queues last as long as 18 hours.

The impact of fuel shortages extends beyond private car owners. Agriculture, public transport, utilities, logistics, and small businesses are all affected. In August, as southern Russia enters harvest season, diesel demand usually peaks, putting further pressure on distillates. The Paper quoted Novak as saying Russia has sufficient fuel reserves, but panic buying has pushed demand up 20-30%, and shortages at particular stations are due to logistic adjustments in refinery deliveries to depots and gas stations.

Crude oil could loosen, refined products may not get cheaper

The crude oil supply-demand balance shows a split. In 2026, the crude side average balance is +1.6 million barrels per day; the refined product side is -1.3 million barrels per day, for a net balance of just +0.3 million barrels per day. By 2027, crude oil’s surplus grows to +4.6 million barrels per day while refined products remain at -1.2 million barrels per day.

Price assumptions reflect this structural mismatch. Brent’s average price is forecast at $85/bbl in 2026, dropping to $63/bbl in 2027; WTI averages $80/bbl in 2026 and $59/bbl in 2027. By quarter, Brent is expected to reach $98/bbl in Q2 2026, then fall to $56/bbl by Q4 2027.

Russian refinery recovery is not a quick process. JPMorgan baseline expects Russian refinery throughput to rise from the current 3.6 million barrels per day to about 4.5 million barrels per day by early 2027, averaging 4.7 million barrels per day for 2027. This assumes Ukrainian drone strikes ease after the September elections and ahead of the winter heating season.

Risks remain on both sides. If drone attacks stop quickly, a significant part of Russian capacity could return in one to two months, easing the refined product crunch. Conversely, if attacks on secondary processing and fuel distribution continue, product market tightness may last longer than crude market tightness. For investors, Hormuz determines crude flows, Russian refineries determine the refined product gap—this is becoming the part of the oil market that’s hardest to trade.

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