By Shashank Pattekar, International Banker
On July 29, oil markets received a stark warning: The risk of another Persian Gulf supply disruption was rising as the inventory cushion available to absorb it was shrinking. Brent settled 7.9 percent higher as renewed fighting revived fears of further disruption to regional exports. Meanwhile, the US Energy Information Administration (EIA) reported a 7.2-million-barrel weekly fall in commercial crude stocks to 404.5 million barrels—6 percent below the five-year seasonal average—while the Strategic Petroleum Reserve (SPR) declined by 3.8 million barrels to 307.7 million. With fewer immediately available barrels to replace lost supply, another future disruption could trigger a faster and more persistent rise in prices.
Readily accessible onshore inventories represent the most acute type of oil-stock depletion at present. In its monthly “Oil Market Report – July 2026”, the International Energy Agency (IEA) reported that global observed oil stocks “rose for the first time in four months in June, by 21 mb [million barrels], as sharply higher oil on water volumes more than offset continued draws in onshore tanks”. Indeed, the 117-million-barrel increase in oil held at sea comfortably outmatched the 96-million-barrel decline in onshore stocks.
This distinction is relevant as onshore commercial stocks held by refiners and storage operators can be drawn upon relatively quickly, as can strategic reserves held by governments. Crude held at sea, however, may still take weeks to reach its destination, or it could be bound for a different region entirely or be unsuitable for a particular refinery. Its ability to relieve an immediate shortage depends on where the cargo is located, when it can be delivered and whether its grade matches refiners’ requirements. Global inventories, therefore, can appear to rise whilst the supply that’s readily available to consumers continues to decline.
Those readily available stocks formed only one of several buffers that softened the initial Gulf shock. The market entered the conflict with supply running ahead of demand, with the IEA projecting in February a 3.7-million-barrels-per-day (bpd) surplus for 2026. “As the severity of the situation became clear in the early days of March, IEA member countries moved quickly—within two weeks of the start of the conflict—to reach a unanimous agreement to carry out the largest ever release of their emergency oil stocks—400 million barrels—to help offset the disruptions,” the Paris-based agency recently reported. Alternative Gulf export routes and Atlantic Basin cargoes have also replaced some supply lost due to the closure of the Strait of Hormuz.
Oil demand also adjusted—Chinese crude imports fell by 40 percent, or 4.6 million bpd, between February and May as refiners in the world’s biggest oil-importing nation cut processing activity and used accumulated stocks instead. Together, surplus supply, reserve releases, re-routed cargoes and reduced consumption all helped to prevent a much more pronounced oil-price shock from transpiring. Their protection came at a cost, however, as global inventories fell by an average of 3.8 million bpd from the conflict’s outbreak in late February through May, thereby reducing the market’s capacity to absorb another disruption.
As inventories decline, the impact first appears in prices for prompt delivery. With fewer barrels stored near consuming centres, refiners seeking immediate cargoes must bid more aggressively. Spot and near-term prices rise relative to later deliveries, deepening backwardation—the downward slope of the futures curve. Storage becomes less attractive when a trader buying oil today can sell it forward only at a lower quoted price while also paying financing and storage costs. Backwardation thus encourages stockholders to release barrels, which can reinforce the drawdown.
“Once they (cushions) thin out, prices have to do more of the adjustment work. That means either consumers pay more or demand gets destroyed,” Mehmet Beceren, vice president and senior market strategist at Rosenberg Research, explained. That adjustment was visible in physical markets on July 24. Dated Brent reached $105.70/barrel (bbl) and North Sea Forties $108.77/bbl, while Dubai and Oman premiums for swaps climbed to $12.74/bbl and $12.62/bbl, respectively.
The Brent contract for difference for the following week doubled to $11.10/bbl, meaning that immediately available crude was valued at $11.10/bbl more than crude for October delivery, indicating severe near-term market tightness. These figures reflect the value of obtaining a suitable grade in the required location without delay; a shortage can become acute within a region well before the aggregate global stock count appears critical.
More crude, however, does not automatically mean more diesel, gasoline or jet fuel. Gulf exports of refined products and liquefied petroleum gas remained below half their pre-war levels in June, even as crude flows recovered to nearly three-quarters of February volumes. Global refinery runs increased by 1.5 million bpd during June but remained 6 million bpd lower than a year earlier. Middle Eastern export refineries had yet to restart; Russian throughput was curtailed by Ukrainian attacks; and Asian plants continued to run at reduced rates.
This lag pushed the crude product price spreads—an approximate measure of refinery margins—to four-year highs by early July, despite falling benchmark crude prices. US and European plants were already operating near capacity, leaving limited room to fill the gap. “Margins are set to stay high,” Neil Crosby, an analyst at Sparta Commodities, told Reuters. “There is simply not enough capacity in the world to deal with the double whammy of Hormuz closure and Russian export bans. Prices need to go up to lower end-user demand.” As such, consumers may receive only partial relief from falling crude prices, with prices at the pump, freight costs and industrial fuel bills remaining elevated until refinery output and product exports recover.
Nonetheless, the capacity to offset further crude losses still exists. By July 21, IEA members had released 290 million of the 400 million emergency barrels authorised in March and retained more than one billion barrels of government-controlled stocks. Atlantic Basin exports to markets east of the Suez Canal were 3.5 million bpd above pre-war levels. OPEC+ (Organization of the Petroleum Exporting Countries) also approved a further 188,000-bpd increase in its August production target. Its core members had already raised quotas by almost 800,000 bpd between April and July, but much of that increase stayed on paper while Strait of Hormuz traffic remained impaired.
Additional releases can buy time while also enlarging the eventual restocking requirement. That said, they will prove less effective the longer the conflict persists.
Additional releases can buy time while also enlarging the eventual restocking requirement. That said, they will prove less effective the longer the conflict persists. “We’re seeing stock draws continuing into the summer, and with the possibility or the likelihood that we reach critical levels or historical low levels just ahead of the peak summer demand,” Toril Bosoni, head of the IEA’s Oil Industry and Markets Division, observed in early June. “In any case, emergency stock releases are only a temporary stopgap measure; they’re not going to solve this problem. The scale of the supply losses [is] so big that the reduction would have to come from the demand side.”
A plausible counter-case centres on rapid supply recovery. “I could say roughly 72 ships in the last 24 hours and 20 million barrels of oil. We have normal flows today,” US Secretary of Energy Chris Wright reported as flows through the Strait of Hormuz recovered in late June. The resulting surge briefly flipped prompt Brent from backwardation to contango with an upward-sloping futures curve.
The EIA recently forecast global inventory builds of 2.7 million bpd in the fourth quarter of 2026 and 5.0 million bpd in 2027 if production recovers faster than consumption. This would likely lower prices, although replenishing strategic and commercial reserves would absorb part of the surplus and temper the decline.
Low stocks still leave the path towards recovery vulnerable to renewed disruption. “Our hope that this conflict would be resolved quickly has not materialised. The shock is much more persistent,” European Central Bank (ECB) Executive Board member Isabel Schnabel acknowledged in late May, identifying longer delivery times, higher freight and input costs, weaker growth and broader inflation pressure. Such conditions leave central banks weighing inflation control against further damage to demand. “There is no soft inflation target,” Federal Reserve Chairman Kevin Warsh confirmed on July 29. “There is no soft implicit target, not on this committee’s watch.”
Normalised Gulf flows and recovering production could rebuild stocks and lower prices. The depleted starting point means renewed disruption would reach prompt crude, refined fuels and the wider economy with less delay. “Oil security is still a critical issue,” IEA Executive Director Fatih Birol said on July 17. “We should be worried, and I am worried, if the situation does not improve in the next few weeks.” Calmer benchmark prices should therefore be treated cautiously until onshore inventories rebuild, emergency releases cease, Hormuz traffic normalises, prompt backwardation narrows, and refining margins ease.