The oil trade is unusual this summer and is almost entirely unrelated to the price of crude. In fact, crude has reeled up to the temperatures it had seen before the Iran war broke out. But diesel, jet fuel and gasoline have been stubbornly out of the way. The difference between low-cost raw materials and high-cost fuels is where the action is and the biggest winners are the Asian refiners, not the oil majors.

It's a point made starkly by the numbers. The industry benchmark for refining profitability, the United States 3-2-1 crack spread, hit an all-time high of about $64.58 a barrel on July 8. European diesel margins turned over $60 a barrel the same week, while gasoline in Europe is trading at a 4-year high premium to crude, a level not seen since after Russia invaded Ukraine in 2022. Refinery stocks like Marathon Petroleum Corp., Valero Energy Corp. and HF Sinclair have all more than doubled this year compared with an 11 percent increase on the S&P 500. None of that rally is about paying a lot for oil producers to hit it rich.

There are two forces that are pushing apart that spread. For a start, the Strait of Hormuz was back to normal after months of disruptions, and hundreds of millions of barrels of stranded crude returned to the market, sending prices on the floor. Second, and of far greater importance, the process of converting crude to serviceable fuel has not come back as quickly. Ukraine has been using drones to attack Russian refineries, fuel trains and tankers for months, and the consequences are mounting up. The volumes of crude processed by Russia have dropped to their lowest level in more than 20 years, as they have approached 3.9 million bpd this month, compared with more than 5.3 million bpd in the same period last year. The attacks on Syzran oil refinery, NOVATEK Ust-Luga complex, and on the giant refinery in Omsk have made Russia take measures to limit gasoline supplies and cap diesel volume exports, and on July 8, it has even announced a complete cessation of diesel exports to address its own shortage. Russia happened to be the world's second-largest diesel exporter, and removing those barrels from the market had an impact on Europe, Turkey and North Africa, all of which were dependent upon Russian fuel.

There is a squeeze in America. Gasoline stocks started the summer driving season at their lowest seasonal level in over 10 years, distillate stocks were about 12 percent lower than the five-year average and a key government report in early July indicated that stocks fell short of analysts' estimates by nearly six million barrels. Refinery utilization remains at more than 95 per cent and there is no spare capacity to add to the challenge despite the high diesel futures.

It is against this backdrop that Asia has stealthily re-positioned itself—and India's refiners in particular. Now, Indian processors are importing a record 2.5-2.6 million bpd of Russian crude, over half of their needs, and paying two to five dollars a barrel less than comparable Gulf grades. In June, India's world's largest single refining site, the Reliance Industries at Jamnagar, boosted its Russian supply by 150 percent, the Finland-based Centre for Research on Energy and Clean Air reports. Indian Oil Corporation's Paradip plant gained 126 percent, Bharat Petroleum's Kochi refinery rose 83 percent and Nayara Energy rose 45 percent. The acquisition spree helped push India's Russian fossil fuel imports to 5.5 billion euros in June, trailing only China, as Russia's exports revenues come in under world-class prices.

The strategic aspect is what India has done with that cheap crude. Indian refiners have increased their fuel exports to around 1.4 million bpd this July, the highest since September, while domestic demand is low due to a slow monsoon season, and margins are hot overseas. As well as Turkey and Georgia, India has exported fuel products valued at 814 million euros to nations that have imposed sanctions against Russia, such as the European Union, the United States and for the first time this year, the United Kingdom, which received its first ever shipment of jet fuel refined in Jamnagar from Russia. What India has done, in essence, is to make the discounted Russian oil a real product that the same Western economies that are cutting off the Russian barrels are willing to purchase again all without having violated any of the sanctions on paper.

Behind the profits there are real vulnerabilities. India has just five days of strategic petroleum stocks to last until the next refueling, while China has more than 90 days and Japan has more than 77 days.India would have only five days of strategic petroleum stocks to meet the needs of the next refueling while China has more than 90 days and Japan has more than 77 days. A new blow off in the vicinity of the Hormuz strait would affect New Delhi as much as anyone else since around 40 percent of India's crude arrives through the Gulf. The largest single customer of Russian energy, China, has proved how fast this window can close in the spring, when it banned all exports of fuel, a move it has reversed again this month after its own stockpiles increased.

Probably, none of these will endure forever. Crude and refined fuel markets converge over time and each additional barrel processed by refiners to capture today's margin creates additional demand that will eventually take the surplus crude off the water. For the moment, however, the numbers are on the side of the processors that can get the fuel cheap and sell it dear, and Asia, particularly India's refining giants, has got itself right in the middle of such a crunch and profited from it, while the rest of the world still tries to make sense of the fuel crisis.The two visuals are a part of the piece: The first one is a comparison of refining profitability margins in various regions, and the second one is an explanation of why Indian refiners are where they are at this moment.