Calm crude, tightening diesel: the real oil market stress is downstream

Why crude isn't trading much higher

Against this backdrop, Brent near USD 90 may appear surprisingly low. Several factors explain why.

First, the world has found ways around Hormuz. Saudi Arabia and the UAE have maximised pipeline routes that bypass the Strait, while cargoes have been redirected through alternative ports and ship-to-ship transfers. These routes cannot fully replace Hormuz, but every additional barrel reduces the immediate shortage.

Second, strategic inventories have provided a crucial but temporary buffer. Governments, led by the United States, have effectively borrowed oil from the future to smooth the impact of the disruption, releasing barrels to keep consumption flowing despite reduced Middle Eastern supply and preventing commercial inventories from tightening as sharply as they otherwise would have.

The scale of that borrowing is now becoming visible. After rebuilding above 415 million barrels earlier this year, the US Strategic Petroleum Reserve has been drawn down to below 300 million barrels, sharply eroding the cushion accumulated before the war. A CNBC report has also warned that the speed and scale of recent withdrawals could introduce physical risks, with the SPR’s roughly 60 Gulf Coast salt caverns in Louisiana and Texas potentially exposed to structural stress from rapid cycling. In effect, the market has been stabilised by pulling forward future supply, but at the cost of a thinner safety net for the next disruption.

Third, high prices have done what high prices normally do: destroy some demand. Consumers have adjusted, businesses have reduced discretionary consumption and weaker economic activity has reinforced the slowdown. The International Energy Agency now expects world oil consumption to contract by 1.6 million barrels per day in 2026, the steepest annual decline since the 2020 pandemic, underscoring how materially demand destruction is beginning to offset the supply shock.

China has been particularly important. Chinese crude imports have weakened sharply during 2026, providing an offset to lost Middle Eastern flows. From April to July China imported a total of 1 billion barrels, compared with 1.4 billion during the same four months in 2025. Given China's position as the world's largest crude importer, this reduction has freed barrels for other buyers and reduced competition for scarce supply.

Finally, the market knows that a large amount of potential supply remains trapped within the Persian Gulf. If a political settlement suddenly allowed tanker traffic to normalise, stored crude and shut-in Gulf production could gradually return. That potential future supply helps cap the geopolitical premium investors are willing to pay today.

Crude is available; diesel is not

The relative calm in crude increasingly contrasts with extraordinary conditions in refined products, where diesel is the clearest example. The WTI-ULSD crack has surged to around USD 103 per barrel, while the Brent-gasoil crack in Europe has reached roughly USD 77 per barrel, both record levels. Gasoline cracks are also elevated, but the stress in middle distillates is substantially greater.

Middle Eastern producers have historically been major exporters not only of crude but also refined products, while the region's heavier crude grades are particularly well suited to producing middle distillates. Disruption to Gulf exports therefore hits the global product market twice: directly through lost refined-product exports and indirectly through reduced availability of refinery feedstock.

Russia has compounded the problem. Ukrainian attacks on Russian refineries have disrupted another major source of global diesel supply, leaving Europe and other import-dependent regions competing for fewer available cargoes.

US refiners have responded aggressively. Strong margins have encouraged high utilisation and US diesel exports have surged as buyers in Europe, Latin America and elsewhere compete for supply. But even this response has struggled to rebuild inventories. US distillate stocks have fallen to exceptionally low seasonal levels despite strong refinery economics.

Political pressure has also begun to build. With domestic fuel prices a sensitive issue ahead of the US midterms, the market continues to speculate on what measures President Trump could implement, including the possibility of restricting fuel exports. However, the effectiveness of any such move may likely be limited by geography and infrastructure. The US Gulf Coast accounts for around 55% of national refining capacity and the vast majority of export-oriented production, with constrained pipeline and transport links limiting the ability to redirect surplus fuel inland. While critics argue that exports are inflating domestic prices, industry participants warn that restricting them may likely reduce refinery runs, leading to lower prices relative to the rest of the world and ultimately lower production as investment is discouraged. In practice, this could tighten both domestic and global supply, pushing prices higher for US consumers rather than lower.

The next phase

For crude, the key indicator may increasingly be empty tanker arrivals into the Gulf. A sustained recovery towards the five to six VLCCs per day Kpler believes are required would allow accumulated crude to clear, reduce pressure on Gulf storage and potentially cap Brent even if geopolitical tensions remain elevated. Failure to achieve that recovery may create the opposite outcome. Continued loadings against insufficient outbound capacity may eventually force deeper Gulf production cuts, converting today's delayed barrels into genuine supply losses.

For consumers, however, the more immediate concern remains refined products. Record diesel cracks are signalling that the global system has very little spare capacity left where it matters most. Crude oil around USD 90 may suggest the energy shock is manageable, but diesel above USD 100 per barrel over crude tells a different story.

After six months of disruption, the oil market has demonstrated remarkable flexibility. Alternative routes, strategic inventories, US exports and demand destruction have prevented a much more dramatic crude price spike. But these measures have largely redistributed the stress rather than eliminated it. The calm in crude therefore risks disguising the more important message coming from product markets: the world has managed to find enough barrels of oil, but it is increasingly struggling to produce and deliver enough of the fuels consumers actually need.