Refining capacity in the U.S. and Europe has been declining since the COVID-19 pandemic in 2019-2020. Some refineries have closed, while others have been converted into storage facilities or biorefineries. Between 2019 and 2025, around 5 mbpd of capacity was shut down globally. However, global refining capacity actually increased by just over 2 mbpd during the same period, thanks to significant investment and expansion in Asia and the Middle East. Refining capacity has been shifting eastwards. Structural changes in Europe are making the continent increasingly dependent on imports of refined products, while U.S. refiners, in addition to meeting domestic demand, have also become the marginal suppliers to the global refined products market. Yet the general reluctance to invest in new refining capacity is likely to have tangible implications for global product export flows and consequently, refining margins.

U.S. refiners have been reaping the financial benefits of the Iranian conflict and the ongoing hostilities between Ukraine and Russia. Despite considerable volatility, margins have remained persistently above historical averages, turning the U.S. into the swing exporter of petroleum products. For example, the U.S. Gulf Coast margins against medium sour crude are up nearly 200% year-on-year, according to consultants. In Europe, Mediterranean light sweet cracking margins in September were three times higher than in September 2025. This trend could provide an incentive to invest in the sector, a move currently encouraged by the U.S. administration. Despite this push, U.S. refiners remain hesitant to commit to new investment, preferring instead to rely on technological innovations to maximize throughput. The reasons for this lack of enthusiasm are twofold. First, record profits are being used to reward shareholders and pay down debt. Second, the prevailing view is that global conflicts will eventually end and allow the refined products market to return to a surplus – despite the diesel shortage the IEA expects to persist well into 2027.

The 630,000 bpd of U.S. refining capacity lost between 2019 and 2025 will not be recovered. The EIA anticipates further capacity constraints in 2026 and 2027. Europe will remain reliant on imports of refined products, while export growth from Asia will be uncertain and concentrated in just a handful of countries, as refining capacity expansion east of Suez is likely to be outpaced by regional demand growth. The U.S. will therefore remain the primary source of refined products for the global market. This should ensure that, even if the geopolitical conflicts are resolved, U.S. crack spreads remain elevated. This outlook is already reflected in the 2028 segment of the CME Group 3-2-1 crack spread curve, which stands at around $36/bbl at the time of writing, just $7/bbl below the year-to-date average and 50% higher than the 2025 average. However, a sharp but temporary decline should be expected in the event of a truce in either or both conflicts. Such a retreat, possibly to the mid-$20s/bbl level, would likely be met by grateful buyers.