Asian Refining Margins Slip Into Negative Territory as Iran War Disrupts Crude Flows

Asian refining margins have turned negative after a brief surge earlier this month, as the ongoing Iran conflict disrupts crude supply chains and forces refiners across the region to cut operating rates.

Benchmark Singapore gross refining margins (GRMs), a key indicator of regional refining profitability, have fallen sharply from multi-year highs of about $40-45 per barrel in early March to between negative $5 and negative $10 per barrel in recent sessions, according to market estimates.

The reversal highlights a rapid shift from supply-driven gains to mounting structural stress in the refining sector.

Supply disruptions strain operations - Countries across Asia are heavily dependent on oil and gas sent through the Strait of Hormuz, a critical waterway where shipping has almost halted following the US-Israeli strikes on Iran and Tehran's sweeping retaliation.

The disruption has led to feedstock shortages, prompting refiners in Singapore, Southeast Asia and parts of North Asia to scale back throughput.

While oil and gas price rises have already rocked markets in the region and raised concerns about inflation, freight rates from available export routes, including Red Sea ports, have also surged, raising the landed cost of crude for Asian buyers.

Industry sources said Singapore GRMs do not account for freight costs, implying actual refining losses may be deeper than indicated by headline margins.

Freight charges have surged by as much as 842%, as shipping companies impose war risk premiums and reroute vessels along longer, safer paths to deliver crude oil.

Rates for an Aframax, a medium-sized crude tanker, have jumped to $9.46 per barrel from pre-war levels of $2.46. Freight on larger Suezmax vessels has risen to $9.90 per barrel from $1.87, while rates for very large crude carriers (VLCCs) have climbed to $9.18 per barrel, up from $0.97 earlier, sources said.

Short-lived rally gives way to sustained pressure - The earlier spike in margins, driven by tight product availability and panic buying, has proven short-lived. Refiners are now contending with constrained crude supply, reduced operating rates and widening market dislocations.

Analysts say the current environment makes it increasingly difficult for refiners to sustain positive margins in the near term.

Softening demand compounds weakness - Demand across Asia is also showing signs of weakening amid elevated fuel prices and supply uncertainty. The slowdown is reflected in reduced airline activity, lower industrial fuel consumption and conservation measures introduced by several governments.

The emerging demand softness is weighing on product cracks, accelerating the decline in refining margins.

Indian refiners not immune - Sources said Indian refiners are also facing similar pressures, given their reliance on Middle Eastern crude imports. Supply disruptions and logistical challenges are beginning to affect procurement strategies and overall refining economics.

At the same time, volatility in product cracks and weaker export arbitrage opportunities are narrowing margins. While complex refineries retain some flexibility to optimise crude sourcing and product yields, the broader trend points to margin compression and increased earnings volatility.