The global refined products market has witnessed a significant shift, marked by the resurgence of Low Sulphur Gasoil (LSGO) crack spreads climbing back above the critical $30 per barrel threshold. This notable ascent, observed from late 2024 through September 2025, signals a period of robust profitability for refiners and underscores a persistent tightness in the global middle distillate market. The implications are far-reaching, impacting not only the energy sector but also broader industries and consumer costs.
LSGO cracks, essentially the profit margin refiners earn from converting crude oil into low sulphur gasoil, serve as a vital indicator of market health. A spread above $30/b reflects exceptionally favorable conditions for refiners, incentivizing increased production of this crucial fuel, which is primarily used as diesel for transportation, heating oil, and marine fuel. This recent surge points to a complex interplay of supply constraints, robust demand in specific sectors, and geopolitical volatility that has fundamentally reshaped the dynamics of the global refined products landscape.
Geopolitical Turmoil and Refinery Bottlenecks Fueling the Surge
The journey of LSGO cracks back above $30/b was punctuated by a series of specific events and underlying market dynamics throughout late 2024 and 2025. The initial signs of a resurgence emerged in late 2024, with an upward trend in U.S. diesel prices, hinting at underlying market shifts despite a general decline in global diesel prices earlier in the quarter. The first quarter of 2025 saw a more definitive climb, driven by heightened winter heating demand, extensive refinery maintenance schedules across the U.S., Europe, and Asia that constrained production, and historically low national stockpiles. Strong export volumes from the U.S. to European markets further tightened domestic supplies.
The second quarter of 2025 introduced significant geopolitical risks, particularly in the Middle East. A flare-up between Iran and Israel in June 2025, including missile strikes and retaliatory actions, exposed the fragility of Middle Eastern energy supply chains, notably the Strait of Hormuz. This immediately injected a risk premium into gasoline and diesel prices, disproportionately benefiting refineries. However, the most pronounced surge occurred in July 2025, when diesel crack spreads at New York Harbor soared to 85 cents per gallon (approximately $35.7/bbl), marking their highest level since February 2024. This spike was attributed to elevated pressure from international markets and ongoing geopolitical tensions affecting supplies.
While August brought a temporary easing, September 2025 witnessed a renewed climb in crack spreads, largely due to disruptions in Russia's distillate production following Ukrainian drone attacks on refining infrastructure and a subsequent Russian ban on diesel exports. These events significantly impacted global middle distillate supply, exacerbating an already tight market. Key players included global refiners who largely benefited from expanded margins, traders and speculators who increased their net long positions, and consumers who faced rising fuel costs. Contributing factors also included the ongoing impact of IMO 2020 regulations, which continued to support demand for low-sulfur marine fuels, and the designation of the entire Mediterranean Sea as a SOx Emission Control Area (ECA) from May 1, 2025, further increasing demand for compliant fuels.
Winners and Losers: Navigating the High-Margin Environment
The resurgence of LSGO cracks above $30/b created a distinct divide among public companies, with some poised for significant gains and others facing substantial challenges. Companies with robust and efficient refining capabilities, particularly those geared towards middle distillates, emerged as clear beneficiaries.
Among the notable winners were Indian Oil Marketing Companies (OMCs) such as Bharat Petroleum Corporation Ltd (NSE: BPCL), Hindustan Petroleum Corporation Ltd (NSE: HPCL), and Indian Oil Corporation Ltd (NSE: IOCL). Nomura issued a "Buy" rating on these refiners in July 2025, highlighting their strong performance. BPCL, for instance, demonstrated superior refinery operating metrics, boasting an average utilization rate of around 106% and a higher distillate yield of approximately 84%, directly translating to increased profitability from strong LSGO crack spreads. HPCL and IOCL also maintained high utilization rates and distillate yields, benefiting from their integrated models and significant exposure to middle distillate markets. Independent refiners with operational capacity also gained from tightened supply due to competitor closures, such as the permanent shutdown of LyondellBasell Industries' (NYSE: LYB) Houston refinery in February 2025 and Phillips 66's (NYSE: PSX) Los Angeles refinery by the end of 2025. Integrated oil companies with strong, efficient refining divisions, like ExxonMobil (NYSE: XOM) with its expanded Beaumont refinery and Marathon Petroleum (NYSE: MPC) with its Galveston Bay expansion, were also well-positioned to capitalize on the lucrative margins.
Conversely, companies facing significant refinery outages, planned closures, or conversions were likely to lose out on the benefits of the high crack spreads. PBF Energy (NYSE: PBF), an independent refiner, experienced major outages at its Torrance and Martinez refineries in California during the first quarter of 2025, directly impacting its crude processing rates and profitability during an otherwise lucrative period for the sector. Companies like Phillips 66, which was in the process of closing its Los Angeles refinery and converting its Rodeo refinery to a biofuel facility, and Valero Energy Corporation (NYSE: VLO), with its Benicia refinery set to close in April 2026, experienced a loss of traditional refining revenue. While these closures contributed to the overall market tightness, they directly reduced the refining income for these specific entities. Integrated oil companies with older, less efficient refining assets or those disproportionately focused on gasoline production when diesel cracks were exceptionally high might also have struggled to fully capitalize on the LSGO crack resurgence.
Wider Significance: A Stress Test for Global Energy Security
The LSGO crack resurgence above $30/b from late 2024 to September 2025 is more than just a market anomaly; it represents a critical stress test for global energy security and highlights several broader industry trends. The primary driver appears to be supply-side pressures, underscoring a structural vulnerability in global refining capacity to meet specific product demands, particularly for diesel. This event provided a lifeline for some refiners after a period of pressure in early 2024, yet it occurred amidst a broader industry trend of rationalization, with capacity reductions in Europe and the U.S. due to environmental costs and conversions to renewable fuels.
The crisis has significantly amplified energy security concerns, particularly for Europe, which continues to grapple with the repercussions of sanctions on Russian refined products. This has forced European nations to seek alternative, often more expensive, diesel supplies from further afield, straining supply chains and increasing costs. Geopolitical tensions, including the attacks on Russian refineries and threats to Middle Eastern supplies, further expose how regional conflicts can have profound global energy market repercussions. Paradoxically, this surge in crack spreads occurred even as global diesel consumption began to shrink in 2024, attributed to persistently high fuel prices and economic stagnation in some Western economies. This suggests that the high cracks were primarily a result of significant supply shortages and disruptions, rather than booming demand, indicating a fundamental tightness in the market's ability to supply diesel at lower margins.
The ripple effects extend across industries. The shipping and logistics sectors are among the most severely impacted, as diesel (bunker fuel) costs represent a significant operational expense. Rising prices lead to increased freight rates, fuel surcharges, and pressure on profitability for carriers, potentially diverting resources from long-term investments in fuel-efficient technologies. Industrial and commercial sectors heavily reliant on diesel-powered equipment, such as agriculture, construction, and manufacturing, also face increased operational expenditures, which can contribute to broader inflationary pressures. From a regulatory standpoint, the event underscores the complex and often unintended consequences of geopolitical sanctions, which can create severe dislocations in global commodity markets. It may also prompt governments to reconsider interventions, such as adjusting fuel duties or implementing subsidies, to manage high diesel prices and potentially spur discussions about enhancing domestic refining capacity and diversifying supply sources. Historically, this period shares similarities with the post-Russia-Ukraine war era of 2022, which also saw record-high distillate crack spreads due to supply disruptions, and the IMO 2020 regulations, which structurally shifted refining economics towards low-sulfur fuels.
What Comes Next: Navigating a Volatile and Transitioning Market
The LSGO market, following its crack resurgence, is poised for continued dynamism, shaped by both immediate market forces and long-term energy transition imperatives. In the short term (post-September 2025), strong demand is expected to persist in specific sectors. The maritime industry, driven by IMO 2020 regulations, will remain a primary consumer of Very Low Sulphur Fuel Oil (VLSFO) and Marine Gas Oil (MGO). Regional demand variations will also be significant, with Asia-Pacific projected to remain the largest and fastest-growing region for low sulfur fuel oil, fueled by industrial expansion and robust shipping activity. However, China's total product demand is projected to decline in 2025 due to slowing economic growth and increased EV adoption. Global refining capacity is expected to grow, particularly in Asia and the Middle East, potentially leading to some near-term overcapacity and lower utilization rates in certain regions, which could impact crack spreads. Price volatility will remain a constant, influenced by fluctuating crude oil prices, supply chain disruptions, and ongoing geopolitical events.
Looking further ahead, the long-term outlook for LSGO is inextricably linked to global decarbonization efforts. The market for low sulfur fuel oil is projected for substantial growth, reaching USD 473.87 billion by 2033, driven by stringent environmental regulations and the increasing adoption of cleaner fuels. However, the International Maritime Organization's (IMO) ambitious targets for GHG emission reductions by 2030, 2040, and 2050 will accelerate a transition away from traditional marine fuels towards alternatives like LNG, methanol, and ammonia. Refiners will need to strategically pivot by investing in infrastructure and technology to enhance VLSFO production and diversify their product portfolios with bio-based fuel alternatives. Shipping companies will adopt multi-fuel strategies, modernizing fleets with dual-fuel capabilities or scrubbers, and enhancing fuel management systems. Traders and bunker suppliers will focus on supply chain resilience, quality control, and strategic partnerships.
Emerging market opportunities include the expansion of biofuel blending facilities, development of advanced fuel management systems, and a growing retrofit and conversion market for older vessels. Asia-Pacific and the Middle East will continue to offer robust demand and refining capacity expansion. Challenges, however, include high production costs, persistent price volatility, continuous regulatory hurdles, and increasing competition from alternative fuels. Potential scenarios range from a "Green Acceleration," where rapid adoption of alternative fuels significantly reduces long-term LSGO demand, to "Persistent Fossil Fuel Reliance" if decarbonization efforts slow, maintaining strong LSGO demand and crack spreads. A "Regional Divergence" scenario could see varying levels of environmental stringency across regions, creating complex trade flows, while an "Economic Headwinds" scenario, marked by global slowdowns, could soften crack spreads due despite lingering supply concerns.
Wrap-Up: A Resilient Market in Transition
The resurgence of LSGO crack spreads above $30/b from late 2024 to September 2025 serves as a stark reminder of the global energy market's intricate balance and its vulnerability to supply shocks. The key takeaway is that while the world is moving towards decarbonization, the demand for essential fossil fuels like low sulphur gasoil remains robust, particularly in critical sectors like shipping and transportation. This period of high profitability for refiners was primarily driven by a confluence of extensive refinery maintenance, geopolitical disruptions in key producing regions, and the enduring impact of environmental regulations like IMO 2020 that tightened the supply of compliant fuels.
Moving forward, the market will continue to be characterized by volatility, influenced by crude oil price fluctuations, the pace of global economic growth, and the unpredictable nature of geopolitical events. The lasting impact of this resurgence is likely to be a renewed focus on energy security and supply chain resilience, prompting governments and industry players to diversify sources, invest in domestic refining capabilities, and accelerate the development of alternative fuels. The high margins seen during this period also provide an impetus for refiners to continue investing in modernizing their facilities to produce higher yields of middle distillates and to explore biofuel blending opportunities.
Investors should closely watch several key indicators in the coming months. These include global refinery utilization rates, particularly in Asia and the Middle East where new capacity is coming online, and weekly inventory reports for middle distillates from major trading hubs. Monitoring geopolitical developments, especially those affecting major oil and gas producers or shipping lanes, will be crucial. Furthermore, tracking the progress of decarbonization initiatives in the shipping sector and the adoption rates of alternative marine fuels will provide insights into the long-term trajectory of LSGO demand. While the path to a fully decarbonized energy system is underway, the recent LSGO crack resurgence underscores that the transition will be complex, often volatile, and will continue to present both significant opportunities and challenges for market participants.
This content is intended for informational purposes only and is not financial advice
