NextFin News - The world's ships are running short of fuel, and the shortage is set to deepen this quarter because the refineries that make it are being squeezed by war. Energy Aspects forecasts a fuel-oil deficit of 218,000 barrels per day in the third quarter, the first shortfall the consultancy has estimated since the third quarter of 2025, when the gap was a marginal 6,000 barrels per day. The squeeze is not a crude-oil problem: crude prices have stayed comparatively contained while refined-product prices have surged, because strikes on refineries in Russia and the Middle East and chokepoint disruptions are hitting the output that actually matters to shipowners and power generators.
The price of very low sulphur fuel oil, the main fuel used in ocean-going vessels since the 2020 global sulfur cap, has jumped 76% in Singapore since the Iran war began to just under $825 a metric ton, or about $130 a barrel, as of September 1. That outstrips a 40% rise in benchmark Brent crude over the same period. Asia will be hit hardest because it depends most on Gulf flows disrupted by the conflict; Singapore, the world's largest bunker hub, imports more than half of its nearly 1 million barrels per day of demand. The real story is not that fuel oil is tight, but why it is tighter than every other barrel in the refinery barrel: refiners are deliberately burning it to make more diesel and gasoline instead.
That distinction matters because it changes who can fix the problem. A crude shortage is solved by pumping more oil. A fuel-oil shortage caused by refinery yield decisions is solved only when someone stops wanting diesel and gasoline more than they want marine fuel - and right now, nearly every major economy wants those light products more. The shortage is a symptom of a deeper imbalance inside the refinery barrel, and it will not clear until the light-product markets do.
The Refinery Squeeze: Why Fuel Oil Pays for Everyone Else's Shortage
The mechanism behind the shortage is a refinery yield decision, not a lack of crude. When refiners are short of crude feedstock or running damaged units, they face a choice about how to split each barrel. Fuel oil is the residual bottom-of-the-barrel product left after distilling off gasoline, diesel and jet fuel. It is also, critically, a feedstock: refineries can feed it back into secondary conversion units - fluid catalytic crackers and cokers - to squeeze out more of the higher-value light products. When those light products are scarce and their margins are fat, the rational move is to crack the fuel oil rather than sell it.
That is exactly what is happening. Gasoline stocks held independently in the Amsterdam-Rotterdam-Antwerp hub fell to their lowest level in nearly five years on August 27. U.S. East Coast distillate inventories, which include diesel, dropped to a record low in the week to August 28, with PADD 1 stocks at 18.4 million barrels - down 33.4% from a year earlier. The tightness is broad: total U.S. distillate inventories sit in the bottom 15th percentile of the 44-year record. "Record-low gasoline and diesel inventories will incentivise refiners globally to maximise secondary unit runs with more fuel oil feedstock barrels, in turn tightening fuel oil balances," said Royston Huan, an analyst at Energy Aspects.
"Record-low gasoline and diesel inventories will incentivise refiners globally to maximise secondary unit runs with more fuel oil feedstock barrels, in turn tightening fuel oil balances."
Royston Huan, analyst at Energy Aspects
The incentive is global, not regional. Nigeria's 650,000-barrel-per-day Dangote refinery, Africa's largest, has ramped up diesel, gasoline and jet fuel exports while its fuel oil exports have fallen, according to trade data compiled by Kpler. A refinery of that size does not move quietly: when Dangote shifts its yield slate, it removes a meaningful chunk of fuel oil from the seaborne market and adds competing supply to the diesel and gasoline pools. The same logic applies across the complex - every refinery facing record-light-product margins faces the same calculation.
So the shortage is manufactured by design. Every barrel of fuel oil that disappears into a coker is a barrel that cannot be sold to a ship. The tighter diesel and gasoline become, the more fuel oil gets consumed as feedstock, and the tighter fuel oil becomes in turn. It is a self-reinforcing loop, and it means fuel oil is the swing product absorbing the shock of the entire refined-complex squeeze. The loop also has a timing asymmetry: converting fuel oil into diesel takes days, but converting diesel back into fuel oil is not an option at all. Once the barrel is cracked, it is gone from the marine market for good.
Supply Is Being Knocked Out at Both Ends
While refiners divert fuel oil into other products, the barrels that would normally reach the market are also being destroyed or withheld. Ukrainian drone attacks on Russian refineries have cut Moscow's fuel oil exports to a record low of 591,000 barrels per day in August, down from an average of more than 860,000 barrels per day in 2025, according to Kpler data going back to 2017. That is a loss of more than a quarter of Russia's fuel oil export volume in a single month - and it comes from the supplier that historically served as the swing source for the global fuel oil market.
The Middle East, the other natural backfill, is simultaneously withdrawing. Middle East fuel oil exports were down 45% year on year to an average of 447,000 barrels per day between March and August. Kuwait's Al-Zour refinery, a top fuel oil exporter, has shipped only one 26,000-barrel-per-day cargo since March, compared with around 191,000 barrels per day in January and February - a drop of roughly 86%. China has also cut refining capacity and exports to conserve domestic stocks, removing another source of supply from seaborne markets. The two regions that would normally absorb a shortfall are themselves the source of the disruption. There is no obvious swing supplier left standing.
Storage levels confirm the pressure. Fuel oil stocks in the three key bunkering hubs of Singapore, Amsterdam-Rotterdam-Antwerp and Fujairah are running about 30% below their three-year seasonal averages. When inventories sit that far below normal, even a small additional supply shock or demand spike translates into an outsized price move - the buffer that usually dampens volatility has already been consumed. "Due to the protracted supply disruption in the Middle East, we expect fuel oil supply to remain critically tight in the third quarter," said Valerie Panopio, an analyst at Rystad.
"Due to the protracted supply disruption in the Middle East, we expect fuel oil supply to remain critically tight in the third quarter."
Valerie Panopio, analyst at Rystad
The demand side is adding to the squeeze as well. Ships sailing longer routes to avoid the Bab el-Mandeb strait and the Red Sea because of Houthi threats burn more fuel per voyage, which raises bunker demand at the same time supply is falling. A vessel steaming around the Cape of Good Hope instead of through Suez can consume 30% to 40% more fuel on an Asia-Europe round trip. The two forces - longer voyages and thinner supply - compound rather than offset each other, and they compound in the one market that has the least spare capacity to absorb them.
The Second-Order Hit: Bunkers Flow Into Freight Rates and Power Bills
The first-order effect of a fuel oil shortage is higher bunker bills for shipowners. The second-order effect is that those costs get passed straight through to the price of moving goods, and from there into the price of everything goods transport. A $100 per metric ton change in bunker fuel prices can add roughly $50 to $150 to the cost of shipping a single 40-foot container, depending on the route and vessel class. With VLSFO up roughly $355 per metric ton from pre-war levels, the arithmetic implies hundreds of dollars of added cost per container on long-haul lanes - before any war-risk premium is even counted.
The freight market is already reflecting that pass-through. The Shanghai Containerized Freight Index global composite has doubled since the war with Iran began and stands at its highest level since September 2024, during the Red Sea crisis. Shanghai to Los Angeles spot rates are up 59% versus late February, and Shanghai to New York rates are up 66%, according to Drewry assessments. Carriers have been able to pass incremental fuel costs along to shippers because the same disruptions that raised bunker prices also removed effective vessel capacity from the market - longer routes tie up more ships, so fewer vessels chase the same cargo.
That is the cross-market transmission channel that makes this more than a marine-fuel story: a refinery yield decision in Nigeria, a drone strike in Russia, and a chokepoint threat in Yemen all arrive at the same destination - the price of a container on a Shanghai-to-Los Angeles voyage. The fuel oil market is small relative to the crude market, but it sits at a leverage point where a modest physical shortfall can move a much larger trade-flow variable.
There is also a policy overlay that makes the shortage stickier than a normal cycle. Since January 1, 2020, the International Maritime Organization has capped the sulfur content of marine fuel at 0.5% mass by mass, down from 3.5%, forcing most of the global fleet to use very low sulphur fuel oil or install exhaust scrubbers. That regulation structurally shifted demand toward VLSFO and narrowed the pool of compliant supply. In 2026, the European Union's emissions trading system also requires carriers to purchase carbon allowances for all intra-EU voyages and half of extra-EU voyage emissions, adding another cost layer that shipowners will try to pass on. The regulatory floor under VLSFO demand means there is a hard minimum level of consumption that will not disappear even at much higher prices - which is precisely what turns a cyclical dip into a structural gap.
For power generators that still burn fuel oil, particularly in the Middle East and parts of Asia, the same price spike raises electricity generation costs directly. That creates a second demand competitor: when grids need fuel oil to keep the lights on, they bid against ships for the same dwindling barrels, and utilities typically have deeper pockets than a spot-market bunker buyer.
The Counter-Thesis: This Could Be a Cyclical Squeeze, Not a Regime Shift
The strongest case against a prolonged crisis is that this is a classic cyclical product squeeze, and cyclical squeezes self-correct. Refiners respond to margins with unusual speed: when fuel oil cracks widen, idled secondary units come back online, refiners switch crude slates, and exports reroute to the highest-priced market. ARA fuel oil stocks actually rose about 15% in August compared with July, according to Insights Global data, suggesting that at least one major hub is already rebuilding inventory. History supports the mean-reversion view: the last fuel oil shortfall Energy Aspects estimated, in the third quarter of 2025, was a marginal 6,000 barrels per day and resolved without a lasting market break. Product markets that gap open tend to gap shut once the price signal is loud enough.
The cyclical argument also has a demand-side answer. If bunker prices keep rising, shipowners will slow steam - reducing speed to save fuel - which destroys bunker demand tonne for tonne. A 10% speed reduction cuts fuel consumption by roughly 25% to 30% because resistance rises with the cube of speed. Scrubber-fitted vessels can legally burn cheaper high-sulphur fuel, giving the fleet a partial escape valve if the VLSFO-HSFO spread widens far enough. And if the Strait of Hormuz reopens and Russian refinery attacks subside, the supply shock reverses almost as fast as it arrived. None of this requires a ceasefire or a peace treaty - just a margin signal and a few weeks.
But the cyclical read underestimates the structural bind. The supply destruction is not just a temporary outage; it is war damage to refining capacity and sustained chokepoint disruption, neither of which repairs itself on a margin signal. A drone strike that disables a coker does not get undone because fuel oil cracks widen - it gets rebuilt on a timeline measured in quarters, if it is rebuilt at all. More importantly, the feedstock loop works in only one direction: refiners cannot quickly un-crack fuel oil they have already converted into diesel. The inventory buffer that would normally smooth a cyclical gap - the three-year seasonal stock level - is already 30% depleted across the major hubs. A cyclical squeeze needs spare capacity somewhere in the system to resolve; this one has burned through most of it.
The two forces are also operating on different clocks. The cyclical leg - inventory rebuilding, slow-steaming, scrubber switching - plays out over weeks to a couple of quarters. The structural leg - war-damaged capacity, a closed or contested chokepoint, a regulatory floor under VLSFO demand - persists until the underlying conflict or rule changes. A mean-reversion trade can be correct on a three-month horizon and still lose money over six, because the cyclical relief arrives and then runs into the structural wall again.
The falsifying signal is specific: if fuel oil stocks in Singapore, ARA and Fujairah rebuild to within 10% of their three-year seasonal average within two months while the VLSFO-Brent premium narrows back toward its pre-war relationship, the structural-shortage thesis is wrong and this was a transient spike. Until then, the burden of proof sits with the mean-reversion camp.
Who Benefits, Who Is Exposed, and What Comes Next
In the short term, the beneficiaries are refiners with complex conversion capacity that can turn cheap fuel oil into expensive diesel and jet fuel, and bunker suppliers holding physical inventory in Singapore and Fujairah who can sell at spot premiums. The exposed are shipowners without bunker procurement hedges, container shippers facing higher freight surcharges, and power generators in fuel-oil-dependent grids. The asymmetry is clear: the refiner captures the margin upside immediately, while the shipping and power sectors absorb the cost over months of contracts.
Over the medium term, the direction of the market hinges on three catalysts. First, the pace of Russian and Middle Eastern refinery repairs and whether Ukraine can sustain its strike campaign against Russian refining capacity - each successful strike removes more fuel oil from the export pool. Second, whether China resumes product exports as domestic demand weakens, which would reopen a supply tap that has been closed. Third, the winter heating-oil draw in the Northern Hemisphere, which competes with shipping for the same distillate barrels and could tighten the complex further just as bunker demand peaks.
The base case is that fuel oil remains critically tight through the third quarter, with deficits only narrowing if war-related disruptions ease - consistent with the 218,000-barrel-per-day shortfall Energy Aspects projects. The upside case, a deeper and longer shortage, triggers if the Strait of Hormuz stays closed or Russian export capacity takes further damage, pushing VLSFO well beyond $1,000 a metric ton and forcing more aggressive slow-steaming. The downside case, a rapid normalization, requires both a ceasefire-level de-escalation and a swift rebuild of hub inventories - a combination the current data do not support, given that stocks are still 30% below seasonal norms and Russian exports are at a record low.
For investors and operators watching the complex, the cleanest read is in the spread, not the level. If VLSFO keeps rising faster than Brent, the shortage is intensifying and the pass-through to freight rates will follow. If VLSFO stabilises while Brent moves, the market is pricing crude risk rather than product scarcity, and the shipping impact will be more contained. The spread is the tell.
The uncomfortable conclusion is that the ship fuel shortage is not an accident of the war; it is the war's chosen channel. Refiners under siege will always prioritise the fuels their domestic economies and militaries need most - diesel, gasoline, jet fuel - and let fuel oil, the barrel's residual, take the hit. Shipping is paying for everyone else's energy security, and until the refineries stop being targets, the bill will keep arriving.
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