U.S. — ExxonMobil CEO Darren Woods stated that global refining capacity constraints have created a disconnect between falling crude oil prices and elevated retail gasoline costs. Phillips 66 estimates that approximately 7 million barrels per day of refinery capacity is currently offline in Asia and the Middle East.

U.S. oil prices have plunged about 10% this week to trade around $76 per barrel, yet motorists are currently paying around $4.06 per gallon for gasoline. Current gas prices are 36% higher than they were on Feb. 27 before the U.S. and Israel attacked Iran.

"Today, the constraints on refining have created a 'disconnect between crude prices and pump prices,'" said Woods. "Gas prices are now being set by the demand for refining — not crude oil."

The refining sector faces operational challenges across multiple regions. About 3 million barrels per day of refining capacity in the Middle East is not available due to the disruption in Hormuz. Ukraine's drone attacks on Russian refineries have knocked out about another million barrels per day of capacity, while China has stopped exporting refined products, removing another couple million barrels per day from the market.

Phillips 66 estimates 1.4 million barrels per day of refinery capacity is offline in Russia. "The Iran and Ukraine wars have shut down refineries with about 5 million barrels per day of capacity," said Gary Simmons, Chief Operating Officer at Valero.

"The tightness in refining explains why fuel remains expensive even as crude oil prices have dropped significantly from this year's highs," said Woods. "That's one of the reasons why we haven't seen crude rise as quickly as people have thought, or we didn't see product prices fall as crude prices came down because there is this disconnect in the marketplace."

Woods noted that the refining capacity available to meet demand is as low as it has ever been. He cited a drop in China fuel exports and lost Russian refining capacity following attacks by Ukraine as key drivers of the shortage.

Refining profits have surged alongside these constraints. Valero's earnings for the second quarter were $3.7 billion, an increase of more than 400% compared to the same period last year. Marathon Petroleum's profits surged more than 300% to $5.1 billion year over year, and Phillips 66's profits surged more than 300% to $3.8 billion year over year.

"Refining fundamentals are very tight and getting tighter with the issues in Russia and the Mideast," said Brian Mandell, executive vice president for marketing at Phillips 66. "If Hormuz reopens, there will be more crude oil than product supply due to the refining constraints."

Mandell added that the refineries, depending on the damage and ability to get spare parts, are going to take a good long time to get back online. Maryann Mannen, CEO of Marathon Petroleum, said that with respect to Persian Gulf conflict, the Middle East refineries have really been slow to come back online. She warned that any further disruption in the region could cause further supply constraints to evolve.

Diplomatic efforts are underway to address the bottleneck in the Strait of Hormuz. President Donald Trump has teased a potential deal with Iran to increase traffic through the strait. Iranian and Omani negotiators have finalized a draft deal to reopen the Strait of Hormuz and are awaiting final approval from Iran's supreme leader.

The U.S., Iran and Oman were nearing an interim 60-day accord to reopen the Strait of Hormuz that would involve no tolls or fees. Under the proposed interim accord, inbound vessels would use a northern lane and outbound traffic a southern lane. Treasury Secretary Bessent said there is a chance we may have a deal on Tuesday or Wednesday to open the strait.

President Trump threatened Iran with renewed air strikes and stressed that his latest offer of talks is Iran's 'last chance' as he demanded full reopening of the Strait of Hormuz. Oil prices are up about 14% since the war started.

Patrick De Haan, head of petroleum analysis at GasBuddy, said U.S. drivers could see pump prices hit a Labor Day record if Washington and Tehran do not reach a stable agreement on the Strait of Hormuz. The Labor Day high for gas prices was $3.83 per gallon in 2012. The 2026 high for gas prices was $4.56 per gallon.

"Prices should ease a bit in the fall as demand softens due to seasonal factors," said De Haan. He noted that Ukraine is being very effective at knocking Russian oil refineries offline. De Haan also observed that if you've got the refinery, you run it absolutely as hard as you can.

Refineries on the U.S. Gulf Coast are benefiting from the import of Venezuela crude oil supplies and a waiver of the Jones Act. "Those refineries down the Louisiana and Texas coast, they have the most options in the world," said De Haan. "There's not a better place to be a refinery in the world. The world is your oyster."

Market data shows continued volatility. Crude oil prices fell to a 3-week low on Tuesday, and gasoline prices dropped to a 4.75-month nearest-futures low on Tuesday. September WTI crude oil (CLU26) closed down -4.57 (-5.69%) on Tuesday, while September RBOB gasoline (RBU26) closed down -0.1145 (-3.86%) on Tuesday. Weekly EIA crude inventories unexpectedly increased, but weekly EIA gasoline inventories fell more than expected to an 8.5-month low.

The divergence between crude oil prices and pump prices shows the critical role of midstream infrastructure in energy markets. With 7 million barrels per day of capacity offline globally, the physical ability to process crude into usable fuel has become the primary determinant of consumer costs rather than the raw commodity price. This dynamic benefits refiners with flexible supply chains, such as those on the U.S. Gulf Coast, while exposing consumers to sustained high prices despite drops in crude benchmarks.

The situation remains tied to geopolitical developments in the Middle East and Eastern Europe. The potential reopening of the Strait of Hormuz could alleviate crude supply concerns, but refining constraints would likely persist due to damaged infrastructure in Russia and the Middle East. The outcome of diplomatic negotiations and the timeline for repairing attacked refineries will determine whether the disconnect between crude and product prices narrows in the coming months.

Why It Matters

Global refining capacity constraints have created a market disconnect where falling crude oil prices do not lower retail gasoline costs. With approximately 7 million barrels per day of capacity offline due to conflicts and export bans, fuel prices are now driven by refining demand rather than crude supply. This tightness has led to record quarterly profits for major refiners while motorists pay significantly more than before the recent escalations.