09/22/2026

Oil Markets Remain Stressed

USAEE NEWSLETTER | FALL 2026

BY MICHAEL C. LYNCH

The oil market has continued to defy expectations, although the recent closure of the East-West pipeline across Saudi Arabia sent them above $100 for the first time in months. Industry executives continue to warn of dwindling inventories, while the Administration insists that oil is transiting the Straits of Hormuz in large volumes and the President promises relief—after the November elections.

The IEA estimates that global oil inventories declined by about 70 million barrels or 2.2 mb/d in July, a slight drop from the average of 2.7 mb/d since the U.S.-Iran War began in February. This reflects better flows through the Straits of Hormuz after June’s Memorandum of Understanding between the U.S. and Iran, but subsequently, the Iranians have declared the Straits closed to all but approved traffic.

Primarily, though, ships are moving through the Straits with their transponders off, making them harder to track. As a result, the oil flows have apparently averaged as much as 10 mb/d in recent weeks, but with large fluctuations. There is significant disagreement about the amounts, partly reflecting the difficulty of estimating ship traffic under these circumstances and partly because some reports appear to play up the more favorable data.

More recently, the Houthis have attacked shipping in the Red Sea, focusing on Saudi tankers using the Bab el Mandab, forcing them to rely more on the Suez Canal, adding to transit time for Asia deliveries and tightening the tanker market. With the recent done attack on the East-West pipeline to the Red Sea, Saudi exports by that route are said to have dropped sharply, taking as much as 5 mb/d off the market. This loss will be temporary, since most pipeline damage is easily repaired, consisting of holes in steel pipe. Damage to compressors would reduce pressure and throughput, but they are much smaller targets and it is not clear if any were hit. On the other hand, the possibility that the pipeline will undergo continued attacks keeps pressure on prices and encourages buyers to seek alternative supplies.

The demand side has responded, with third quarter demand estimated to be 2.7 mb/d below last year, about 2 mb/d lower in the non-OECD countries of which nearly half was reduced Chinese demand. These numbers are uncertain but anecdotal reports of governments discouraging consumption and restricting supplies suggest that they are probably reasonable.

Uncertainty about Chinese oil demand and imports remains significant. It has been widely reported that Chinese imports dropped by as much as 5 mb/d during the war, much of which was apparently offset by inventory drawdowns, presumably from government stocks. However, the government put restrictions on product exports which may have created a disparity between imports and consumption.

More recently, perhaps in response to adequate domestic inventories but also soaring product prices in Asia, the government has relaxed those restrictions. Reports of Chinese buyers seeking new supplies could be in response to that and could put upward pressure on crude oil prices while reducing product prices, bringing refining margins closer to normal.

Another cause for concern is the lower amount of supply entering the market from strategic inventory releases. After peaking at nearly 3 mb/d in May, they fell to 1 mb/d in July and lower in August as the Figure shows. In part, the market was weaker after June’s MOU and subsequent higher exports, but also some countries may be nearing their preferred minimum level. This is especially the case of the U.S., where the Strategic Petroleum Reserve has dropped below 300 million barrels for the first time in four decades. Although there is uncertainty about precisely how low those inventories can fall, the legal minimum is 250 million barrels and it is said that below that level operational difficulties at the very least reduce possible flow rates.

IEA STOCKS AND DRAWDOWN RATES

Source: IEA data and author’s estimate.

To add some very major insults to the injury of the Straits’ restrictions, the Houthis have attacked some shipping in the Red Sea and Saudi oil facilities as well, although the East/West pipeline was apparently targeted by Iraqi militias. That could reduce supplies by 1 to 3 mb/d going forward, depending on the level of future attacks and their success.

Further, Ukraine has lately been successfully targeting the Russia oil industry’s infrastructure, and especially the country’s refineries. This has led to shortages of products inside the country but also restrictions on product exports, with diesel fuel dropping by 1 mb/d to near zero. This has worsened the already tight global situation for light products, with middle distillates (diesel) and jet fuel especially affected. The difference between diesel fuel and crude oil in Asia has

At this writing, it appears as if none of the three conflicts affecting oil markets is likely to be resolved any time soon, although diplomatic breakthroughs do sometimes occur. Given that, despite ongoing efforts to protect shipping routes, crude supplies are likely to remain constrained enough to keep prices well above pre-war levels, arguably in the $80-100 range. Higher Chinese purchases and less oil from IEA strategic stocks could send prices well above that in coming weeks.

A major concern remains the possibility that even with increased supplies from the Gulf, they will remain below pre-war levels and lower supplies from strategic stocks and higher Chinese purchases could tighten the market again, causing panic buying as commercial inventories begin to fall low enough to create bottlenecks and logistical problems.

Even with a cessation of hostilities in the Gulf and restoration of flows, it will take time for supplies to recover and inventories to be restored to normal levels, meaning price relief will not be complete for months, perhaps in to next summer. Hopefully, government actions, such as price or export controls, will not worsen the situation.

Michael C. Lynch is the president of Strategic Energy & Economic Research and is a distinguished fellow at the Energy Policy Research Institute. He writes quarterly column for the USAEE e-newsletter.