Oil prices have been on a climb for over a week now as hostilities in the Middle East continue, and despite recent talk of a glut, the physical market is flashing signs of tightness—and higher oil for longer.
Earlier this month, analysts were quick to start warning of an oil glut looming over the world as traffic via the Strait of Hormuz recovered in leaps and bounds amid the U.S.-Iran ceasefire. That was one shaky ceasefire, however, and it broke down soon enough to the apparent surprise of most oil forecasters. Traffic via Hormuz is once again paralyzed, tanker crossings are sporadic, and Iran and the United States are intensifying the exchange of fire. Meanwhile, global oil stocks are melting like snow.
In its latest Oil Market Report, the IEA said earlier this month that in June, global oil supply had rebounded sharply, by 4.1 million barrels daily, thanks to the ceasefire. However, the agency pointed out, even with that sharp rebound, global oil production was 9.4 million barrels daily lower than it used to be before the war began. Drawdowns from oil inventories continued, the IEA also reported, even though what the agency calls global observed oil inventories rose in June by 21 million barrels. While those rose, OECD crude stocks fell by 62 million barrels, following a draw of 73 million barrels in the previous month.
The United States, meanwhile, is approaching critically low levels in its oil storage facilities due to the extensive drawdowns since the start of the war with Iran. These drawdowns have pushed inventories at Cushing, Oklahoma, to minimum operational levels, the Wall Street Journal reported earlier in July, meaning further draws from that facility would be ill-advised as they would compromise the storage facility itself. In more worrying news, inventories in the Strategic Petroleum Reserve are also running low, the WSJ reported in the same news story, sitting at the lowest since 1983.
“The worst fears of the oil market could still be realized later this year as we get to the minimum operating levels,” Andy Lipow, president of Lipow Oil Associates, told the Wall Street Journal. “The only way to get prices back in balance is to have prices go up, such that you would have demand destruction. Once the shelf is bare, there’s nowhere to turn,” Lipow added.
Prices, meaning fuel prices, will likely do just that, because fuel supply remains tight. The gasoline crack spread, or the difference between the price of crude and the price of the fuel, has gone up to $0.90 per gallon since the start of July, the Wall Street Journal again reported. While U.S. crude is trading at around $80 per barrel ($84 at the time of writing), which is 18% above pre-war levels, gasoline prices are 32% higher than they were at the end of February, data that the WSJ cited from OPIS showed.
The reason for this discrepancy, if one could even call it that, is simple enough. With crude oil, when prices surged following Iran’s closure of the Strait of Hormuz in response to the U.S. and Israeli strikes, China stopped importing so much. China had built itself a sizable oil inventory stock that it used to weather the supply shock. Yet there was no comparable stock cushion for fuels—and to make matters more complicated, refineries in the Middle East have suffered damage from the war, while in Russia, Ukrainian drone attacks have also hurt output and led to a ban on diesel exports.
What this means is that even if oil prices fall from their current elevated levels, which tends to happen occasionally following President Trump’s social media posts, this will not translate into an immediate decline in fuel prices, regardless of what the U.S. president posts. Per data from the International Energy Agency as cited by the WSJ, refineries in the Middle East processed 20% less crude in the second quarter of this year than they did in 2025. In Russia, drone attacks have disabled an estimated 25% of refining capacity, which led to the diesel ban, which would have a ripple effect on global markets because Russia supplies an average 11% of the world’s diesel.
A further complication for fuel markets comes from the demand side. There has been some demand destruction as a result of the war, but overall, demand for the fuel—and for diesel, too—has remained resilient, as tends to happen with fuel demand in times of troubled supply due to the global economy’s dependence on said fuels. Because of that dependence, governments tend to do whatever they can to shield fuel consumers, and that makes demand destruction challenging.
Demand destruction has been noted as the one sure way to bring down energy commodity prices in times of tight supply. The abovementioned dependence on the global economy on those energy commodities, however, highlights the risky nature of that price stabilization approach—letting the market’s nature take its course. Because letting demand destruction happen would be so risky, governments will likely remain committed to controlling fuel prices—and those prices will remain elevated for longer.
By Irina Slav for Oilprice.com
