Shell expects to report that its refining margin hit a record high in the third quarter, driven by volatility stemming from the conflict in the Middle East and a global supply squeeze across fuel markets.

The London-based energy major said Wednesday that its refining margin marker is forecast at $42 a barrel for the third quarter compared with $24 a barrel in the second quarter. The previous record margin was $28.04 a barrel, shortly after Russia's full-scale invasion of Ukraine in 2022.

Refining margins measure the difference between the cost of crude and the value of the fuels produced from it. The high margins reflect demand for refined products outpacing refiners' ability to produce them.

While margins over the quarter jumped, Shell wasn't able to maintain the same level of activity at its refineries as it did in the second quarter. Low water levels in Germany's River Rhine dragged on its refinery utilization rate, taking it down to between 93% and 97% from 102% in the prior quarter, when it ran its refineries as hard as possible to increase production of jet fuel and diesel.

Shell's performance update comes as the conflict in the Middle East continues to cause chaos in energy markets.

Oil prices have remained elevated since active fighting ended in the war between Iran and the U.S. and Israel that broke out early this year. Prices remain highly responsive to geopolitical developments that signal an end or a reignition of the conflict, as well as to related events such as the Houthis in Yemen, allies of Tehran, growing their power along the key Red Sea shipping strait.

Energy companies' trading arms tend to benefit from swings in prices and Shell said it continues to expect a strong performance from its oil and gas traders.

Nowhere has the war's impact on the global energy system been more pronounced in recent months than in the refining sector, where crude oil is turned into the products that power the global economy.

While Middle Eastern crude oil is finding its way to the global market via pipelines, the market for oil products remains exceptionally tight. Several large refineries that produced jet fuel and diesel have been damaged and will take time to repair.

Diesel prices in the U.S. and U.K. have hit record highs and refining margins are at unprecedented levels. In the U.S. on Wednesday, the average price of a gallon of diesel was $6.31 compared with $3.68 last year.

Coupled with Ukrainian drone attacks on Russian refineries and Chinese export bans, the market is set to remain tight into 2027.

High European gas prices also offer an earnings tailwind. Storage levels across the continent are low and countries are competing with Asian customers for cargoes.

The impact of the conflict on Shell's gas unit has been mixed. One of its crown-jewel assets, the Pearl gas-to-liquids facility in Qatar, was targeted, with production yet to resume. On the other hand, it has benefited from higher prices and its traders being able to sell liquefied natural gas from North America to higher-paying European customers.

Meanwhile, Shell raised its third-quarter integrated gas production outlook to 740,000 to 780,000 barrels of oil equivalent a day as it benefits from the integration of Canada's ARC Resources, which it bought for about $13.6 billion in April.