Crude oil prices have recently retreated amid volatile trading conditions, with WTI crude briefly falling to a one-month low this week. The pullback reflects an unwinding of geopolitical risk premium that had been generated by Middle East conflict concerns, particularly following statements from the United States indicating it would not attack Iran before the November midterm elections. Supply-side developments have accelerated the price decline.
Middle East exports have rebounded significantly, with the number of oil tankers transiting the Strait of Hormuz rising markedly in recent weeks. Saudi Aramco has cut the official selling price of its flagship crude grade for Asian buyers to a six-year low. The International Energy Agency has accelerated strategic stock releases from the coordinated 100 million barrels of G7 releases, with diesel prioritized during the first 20 days.
Libyan production has exceeded 1.4 million barrels per day, while US crude output has reached a record high. These combined factors have eased market anxiety created by the prospect of Strait of Hormuz disruption. Demand, however, continues to weigh heavily on the market.
The IEA sharply cut its 2026 global oil demand forecast in its September report, with the scale of downgrade comparable to those seen during the 1970s oil crises, the 2008 financial crisis, and the 2020 Covid-19 pandemic. High oil prices are already curbing consumption, while weak manufacturing activity in Europe and the United States, combined with rising refined-product inventories, point to continued demand weakness. A critical market dynamic has emerged: crude supply is recovering while refined-product supply is not.
According to Kpler data, refined-product shipments through the Strait of Hormuz account for only approximately 11% of total flows, compared with more than 20% before the conflict. Refineries in the Gulf were damaged during fighting, and facilities in Saudi Arabia, Kuwait, the United Arab Emirates and Iraq have yet to restore full operations. US diesel inventories have fallen to their lowest seasonal level since 1982, while European stocks remain below their five-year average.
This divergence is proving central to understanding market dynamics. Crude prices can fall while diesel prices remain elevated, a situation likely to persist for some time. The Energy Information Administration has emphasized that exceptionally tight diesel supplies are supporting crude demand because refiners are working to maximize diesel output, putting a floor under crude prices.
Commercial inventory buffers face rapid depletion. The IEA reports global oil inventories fell at an average rate of 2.8 million barrels per day between February and August, leaving a much narrower commercial-stock cushion. According to the IEA, global oil inventories are declining at a record pace, meaning the market is far less able to absorb another supply disruption than at the start of the conflict.
Any renewed geopolitical shock could therefore produce a sizeable upside move in prices. The global oil supply deficit remains unresolved. The IEA has increased its expected decline in 2026 global oil demand to 2.5 million barrels per day, but has simultaneously cut its supply forecast by 1.3 million barrels per day.
The supply downgrade exceeds the demand downgrade, widening the projected full-year average deficit from 1.3 million barrels per day to 1.7-1.75 million barrels per day. The return to a supply surplus has been pushed back to 2027. Demand has been squeezed by high oil prices rather than cooling naturally, indicating that the underlying supply problem remains unresolved.
OPEC+ is unlikely to loosen its stance in the near term. At its early October meeting, the group rolled its September production quotas forward to November without adjustment. While OPEC+ raised output modestly on six occasions between March and August, with the full 1.65 million barrels per day of additional voluntary cuts being unwound, production and export disruption caused by Middle East conflict makes it difficult to translate higher quotas into actual supply growth.
By holding steady, OPEC+ is signalling it is watching developments rather than rushing to add more supply. Winter diesel demand emerges as the critical variable to monitor. Northern Hemisphere heating demand for diesel and heating oil will tighten inventories that are already exceptionally low.
Goldman Sachs expects diesel and jet fuel crack spreads to remain above 40 dollars per barrel in 2027, more than twice normal levels, with the global refining system approaching its limit of the past 20 years. Gulf refineries will require significant time to repair, with analysts generally expecting full recovery only after 2027. Overall, the fall in oil prices represents essentially a shift in the geopolitical premium from panic pricing back to risk pricing.
The market had priced in the worst-case scenario of a complete Strait of Hormuz blockade. As some crude transport has resumed, part of that premium has naturally unwound. However, underlying strains remain unresolved, including falling inventories, refining bottlenecks and a structural diesel supply shortage.
Oil prices are likely to remain high and trade in a wide range in the short term. Low inventories and the supply deficit should provide downside support, while weak demand and easing geopolitical tensions should limit upside. The main risk is whether the structural problem in diesel, where volumes cannot be transported, refined or stocked in sufficient quantities, can be eased before winter.
Source: Investing.com analysis by Martin Lam, ATFX Chief Analyst for Asia Pacific
Source: investing.com