The oil shock moves downstream

The global oil shock is starting to look different. Crude is still expensive and volatile, but the bigger pressure is increasingly showing up further down the barrel — in diesel, refining margins and the fuels that actually move goods, farms, and factories.

Brent crude was trading above $105 a barrel on Thursday as hopes of an early end to the US-Iran conflict remained weak. At the same time, the crude market has begun to adjust. Saudi Arabia has restarted its East-West pipeline, Iraq is raising exports, and more Gulf barrels are finding ways around the Strait of Hormuz. These shifts have helped pull crude prices lower at times, even as geopolitical risks remain high.

The refined-products market, however, is proving much harder to ease.

Global diesel supplies have tightened sharply as the Iran conflict and disruptions to Russian refining have reduced supply from two important exporting regions. Inventories have fallen, refinery outages have added to the ave increased the shortage, and diesel refining margins have gone up to record levels.

The gap is now striking. The gap between crude and diesel prices has widened sharply. In Europe, diesel was recently trading at a premium of around $95 a barrel over Brent, while the US diesel premium reached a record of over $119 a barrel recently. Diesel margins in Asia have also risen to record highs.

This matters because diesel, not crude, keeps trucks, farms and construction moving. Higher diesel prices quickly raise freight, farming, and industrial costs, eventually feeding into consumer prices.This also means a fall in Brent may not bring immediate relief on inflation. For Pakistan, this is particularly important because high-speed diesel is widely used in freight, agriculture, and industry. If global diesel margins stay elevated, domestic cost pressures can remain high for much longer even if crude prices soften.

The supply problem is also harder to solve than a shortage of crude. While producers can redirect cargoes or pump more oil where spare capacity exists, refining capacity is much less flexible. Disrupted refineries can take weeks to return to full production, while existing plants can only raise output so much.

And inventories offer little comfort. US diesel stocks are unusually low for this time of the year, while European inventories are also below historical averages. Industry estimates suggest tight diesel conditions could continue into 2027.

China has provided some relief by increasing exports of refined products, including diesel. High refining margins should also encourage refineries elsewhere to maximise output. But neither offers a quick fix, particularly if geopolitical disruptions continue.

At the start of the crisis, the main question was how much crude supply would be lost and how high Brent could go. Some crude flows are now adjusting. But the downstream system has not adapted nearly as quickly.The next phase of the energy shock may therefore be less about whether Brent is at $100, or $110, and more about what refiners are charging to turn those barrels into the fuels the global economy actually uses.

The oil shock has not gone away. It has simply moved downstream.