Refinery damage keeps fuel prices high as crude demand weakens

Global oil demand is on track to fall this year for the first time since 2020, according to the International Energy Agency. Crude prices have eased as more supply reaches the market, but damaged refineries and uneven demand have kept gasoline, diesel and other fuels expensive.

The IEA report said demand is expected to decline by about 1 million barrels a day in 2026. The agency attributed the drop to elevated oil prices and disruptions to physical supply that hit regions unevenly.

Those disruptions stemmed from the war between the U.S. and Iran, according to the report. Crude-laden ships were stuck in the Persian Gulf for more than three months because they could not safely pass through the Strait of Hormuz, a key route for oil and gas shipments.

Asia led the decline in oil use

Global oil demand averaged 97.9 million barrels a day in May, down 5.3 million barrels a day from a year earlier, the IEA said. Asia accounted for much of the fall because the region depends heavily on crude from the Middle East.

China posted the largest decline, with demand down 1.5 million barrels a day, or 9%, according to the IEA. Jim Burkhard, vice president and head of crude oil research at S&P Global Energy, said China sharply cut purchases from the global market as prices rose in the spring.

Burkhard said China reduced consumption by almost 6 million barrels a day and relied on large inventories rather than buying as much crude during the crisis. Daniel Sternoff, a senior fellow at Columbia University’s Center on Global Energy Policy, said China also paused additions to its strategic petroleum reserve, which had been rising by nearly 1 million barrels a day.

Sternoff said China’s growing use of electric vehicles also reduced road fuel demand during the crisis. He said gasoline and diesel demand losses in China appear to be running at roughly 500,000 to 600,000 barrels a day.

Crude eased, but fuel stayed costly

A fragile ceasefire allowed some ships to leave through the Strait of Hormuz in June, putting more oil on the market and pushing crude prices lower, according to the report. Burkhard said renewed U.S.-Iran tensions this month moved prices by a few dollars but did not produce the same market shock seen earlier in the war.

He said the Strait of Hormuz remains uncertain because Iran is still trying to control the passage while the U.S. has not fully restored normal operations. Burkhard said a return to prewar conditions is unlikely.

Refined fuel prices have not fallen as quickly as crude because fewer refineries are available to process oil, Burkhard said. He cited damaged Russian refineries after Ukrainian drone strikes and Middle Eastern refineries that remained impaired by the war.

With China buying less and some refineries unable to run normally, Burkhard said the market has had more crude available than buyers ready to process it. That has left prices for gasoline, diesel and other refined products elevated for longer than crude oil prices.

U.S. drivers kept using gasoline

The U.S. was the major exception to the global drop in oil use, according to the IEA. American gasoline consumption rose in the second quarter even though pump prices in May were about 50% above prewar levels.

AAA data showed regular gasoline averaged more than $4.50 a gallon in the U.S. in May, up more than 50% since the start of the war. Sternoff said gasoline has taken a smaller share of U.S. household income over time, and the shift from remote work back to offices may also have supported driving demand.

This story draws on original reporting from Fortune.