The supply of fuel oil for the shipping industry is being squeezed by the war-driven tightness in diesel fuel, as refiners prioritize diesel production over fuel oil, Reuters has reported, with Asia set to suffer the most severe blow.

According to Energy Aspects, as quoted by Reuters, the shortage is seen at 218,000 barrels daily in the current quarter — which would be the first quarter of a shipping fuel shortage since 2025. At that time, the shortage was far smaller, at just 6,000 barrels daily.

"Due to the protracted supply disruption in the Middle East, we expect fuel oil supply to remain critically tight in the third quarter," a Rystad Energy analyst told the publication.

Refinery margins are running at record highs across the world as the energy crisis unfolds. The first aspect of the crisis is the tighter supply of crude from the Middle East. There has also been refinery damage in the region: per the International Energy Agency, as much as a fifth of that refining capacity, totaling some 9.6 million barrels daily, has been knocked out by hostilities.

In addition to the Middle East disruption, Ukrainian drone attacks have affected diesel production in Russia, to the extent that the country imposed a ban on diesel exports, adding to the tightness in supply.

In response, refiners have prioritized diesel fuel production, which means they are making less fuel oil — a product used to fuel ships but also in some power plants. Since the IMO 2020 rules capped the sulphur content of marine fuels, much of the world's commercial fleet has come to rely on either very low sulphur fuel oil (VLSFO) or marine gasoil, which ties bunker supply directly to refinery output decisions of exactly this kind. Compounding the fuel oil situation, refiners have little reason to change their priorities anytime soon.

"Record-low gasoline and diesel inventories will incentivise refiners globally to maximise secondary unit runs with more fuel oil feedstock barrels, in turn tightening fuel oil balances," Energy Aspects analyst Royston Huan told Reuters.

The squeeze comes at a time when shipping already faces elevated operating costs from rerouting around security risks in the Red Sea region, and a tighter fuel oil market would add further pressure on bunker costs for carriers — a burden that, in a tight market, is typically passed along the supply chain to shippers and ultimately consumers. Asia's exposure is the greatest because the region depends heavily on Middle Eastern refinery exports and hosts the world's largest bunkering hubs, led by Singapore. How the market absorbs the shortfall — and whether refiners shift run levels as the quarter progresses — will be evident in bunker fuel premiums and the pace of inventory draws reported in the weeks ahead.

By Irina Slav for Oilprice.com.