Demand destruction is emerging as an increasingly likely outcome in Europe's oil market as refiners confront collapsing margins and tightening crude supply tied to ongoing disruptions around the Strait of Hormuz, Rystad analysts said in a white paper on Tuesday.
The immediate pressure stems from a widening disconnect between futures markets and physical crude costs. While forward prices suggest refiners should maximize output, the reality on the ground is the opposite.
Replacement barrels are trading at more than $25 per barrel above front-month Brent crude futures, with freight adding another $10-15/bbl. That combination has wiped out profitability, leaving refiners with little economic incentive to maintain high utilization.
The supply backdrop is worsening, not stabilizing. April is set to record a deeper disruption than March, with Middle East Gulf production tracking near 14.3 million barrels per day, about 3 mmb/d day lower over the month and far below pre-conflict levels.
Although export routes via Yanbu, Fujairah and Ceyhan are operating at record capacity, they remain insufficient to offset the loss of flows that typically transit Hormuz.
Crude movements through the strait have declined further despite an early-April ceasefire. Hopes of recovery following the agreement have faded amid unresolved access conditions and ongoing naval restrictions, which have curtailed even Iranian exports, the last remaining steady flows.
Even in a best-case scenario, analysts expect supply to recover only gradually, reaching 80-90% of pre-war levels by July, with additional delays before those barrels reach refineries.
Meanwhile, the physical market remains under severe strain. Spot premiums for Atlantic Basin crude have surged to record levels, intensifying competition for replacement supply. European refiners, particularly in the Mediterranean, are being forced into the spot market to replace disrupted long-term contracts tied to Gulf producers.
Despite historically high fuel prices, refining margins have collapsed as crude input costs outpace product revenues. Margins that reached roughly $30/bbl in March have fallen to just a few dollars, pushing operators toward run cuts or shutdowns.
At the same time, Europe is losing inbound fuel supplies as cargoes are diverted to Asia, where stronger pricing, led by Singapore benchmarks, continues to pull flows eastward. Regional inventories are declining ahead of peak summer demand.
If sustained, the imbalance leaves only one mechanism to restore equilibrium, a sharp rise in fuel prices sufficient to curb consumption. Analysts warn that such demand destruction, if it occurs, is likely to come abruptly rather than gradually, as the market adjusts to one of the largest supply disruptions in modern history.