Q2 2026 Research Theme: Global Oil Markets Are Far Tighter Than Benchmark Oil Pricing Suggests
- Jun 30
- 14 min read
For this research note, we return to the oil macro theme outlined at our AGM in early July - namely that the rapid pullback of benchmark oil prices to pre-war levels post the U.S./Iran MOU of mid-June, was premature, unduly heralding a return to calm normality.
Back then, the widening Brent contango alongside the Managed Money gross short position in Brent crude hitting a 12-month high certainly suggested an impending oil glut. Hardly surprising given the veritable ‘glutfest’ of those early July headlines: ‘… IEA warns of supply glut’, ’World facing a glut of oil …’, ‘… Fears of a Global Glut’, ‘… Has the Oil Shortage Turned Into A Glut?’ et al, prompted by IEA comments, amplified within the oil analyst community.
To our mind, such headlines, oil prices and fund positioning all screamed complacency:
Arabian Gulf upstream oil production & midstream infrastructure required ‘rebooting’ and repairs and transit capacity via the Strait of Hormuz remained severely constrained.
Buffer inventories were running low - OECD oil stocks at their lowest level since the 1990s, the U.S. SPR at its lowest level since 1984 while the Cushing, OK crude oil storage hub was nearing ‘tank bottoms’ - a critically low level not seen in 12 years.
It also remained highly likely that the US/Iran ceasefire would not hold and that hostilities within the Gulf region would inevitably flare up once more.
And yet, despite all these ‘red flags’ within the physical oil market, benchmark oil prices precipitously returned to pre-war levels upon the mid-June signing of the US/Iran MOU.
Within weeks of the MOU, hostilities predictably kicked off again in the Gulf region but also expanded to the Red Sea with Houthi attacks on oil tankers and Saudi oil infrastructure.
Some six weeks later, the conspicuous fragility of the physical oil market foreshadows a global oil crisis far worse than the immediate aftermath of the breakout of Gulf hostilities in early March. With vital buffer stocks of both crude oil and refined products largely exhausted, price is now the last market-balancing lever still standing.
The post-MOU surge in tanker transits through the Strait of Hormuz never scaled to pre-war levels and has, given the resurgence of Gulf maritime attacks, inevitably withered to little more than a trickle.
And despite all the talk of an impending oil glut, this surge in tanker traffic was primarily outbound traffic - an ‘armada’ of oil tankers filled to the brim, destined for export markets after being stranded in the Gulf for months: a one-off evacuation of up to 150 mmbbls of crude oil in floating storage, according to Kpler1 and other observers.
1Kpler: a data analytics platform for global physical trade
Weekly Crude Oil Tanker Transits via Strait of Hormuz
Notably absent from Strait of Hormuz transit data is any significant inbound oil tanker traffic. While Gulf oil exports are increasingly being rerouted via overland export pipelines to Yanbu and Fujairah, inbound tanker traffic must still increase substantially for overall Gulf oil exports to return to normal pre-war levels on a sustainable basis. After all, every outbound seaborne oil cargo ultimately requires an inbound oil tanker!
Inbound tanker transits are a key gauge of transit risk levels and thus future Gulf oil output.
Global crude oil supply remains materially below pre-war levels …
Kpler estimates the overall shortfall of Gulf oil exports to pre-war levels has shrunk of late to some 6 mmbopd (ca. 40% of pre-war levels) but the situation could swiftly deteriorate should the recent expansion of hostilities beyond the Arabian Gulf to the Red Sea seriously curtail or terminate the 4 - 5 mmbopd of Saudi crude oil currently being exported via Yanbu.
Don’t expect short-cycle U.S. shale to come to the rescue.
U.S. crude oil production may have hit a record of almost 14 mmbopd in April, slipping back modestly of late to ca. 13.8 mmbopd, but year-on-year crude oil production growth in the Permian basin, the ‘baseload’ of U.S. oil output, continues to slow as the overall decline rate inexorably climbs with basin maturity.
Indeed, based on U.S. EIA and OPEC projections, overall U.S. shale oil production is forecast to decline – albeit modestly – in both 2026 and 2027.
Permian Oil Production Growth Is Slowing
U.S. Tight Oil Production Growth
And other significant sources of incremental non-OPEC oil production growth - Guyana, Argentina & Canada - only offer longer-cycle response times.
… So how come Brent never topped US$140 per barrel?
First time round, back in March, an extended closure of the Strait of Hormuz was widely expected by many industry observers to send oil prices spiralling to US$200/barrel and beyond to choke off demand. Yet Brent has not topped US$140/bbl since hostilities began.
The oil market held two ‘Get Out Of Jail’ cards:
The largest-ever drawdown of IEA member crude oil & product inventories
Mid-March, to mitigate the supply shock of the Strait of Hormuz closure, the IEA mandated the release of a record 412 million barrels of crude oil and products from IEA members’ emergency reserves, more than double that released after Russia invaded Ukraine in 2022. To date, about 290 million barrels (70%) have been jointly released under this mandate.
China’s unprecedented ca. 5.0 mmbopd cut to its crude oil imports.
China cut seaborne crude oil imports by a staggering 4.5 – 5.0 mmbopd from pre-war levels through June, blunting the lion’s share of the Gulf supply shortfall. China has, in recent years, imported between 11.0 and 11.6 mmbopd of crude oil, peaking during its 2025 stockpiling campaign. However, such imports dropped sharply to some 7.0 mmbopd by mid-2026, the result of state-dictated constraints on fuel exports and thus refinery runs.
China has become the de facto global Swing Buyer … for now
Just as OPEC once played the role of global Swing Producer (a role usurped by U.S. Shale during its heyday), so China – given its vast stockpile of crude oil - has perhaps now become the global ‘Swing Buyer’ of crude oil.
Despite Crude Oil Supply Shortfall, Global Product Demand Remains Robust
The IEA and Kpler agree that the Strait of Hormuz closure has held about 1.3 bnbbls of crude oil back from the market to date. So, what’s happened to global product demand?
Global product demand - judging by road traffic and aviation data, which have proved reliable real-time indicators of end-user demand – actually remains robust. Indeed, the recent ‘flood’ of Gulf crude oil and product exports tapped pent-up demand in Asian markets, suppressed by import shortages.
Global aviation demand is modestly up year-on-year – up 2% year-on-year. Indeed, July has witnessed a record-breaking surge of commercial flights, reflecting booming global travel demand, with airlines operating at near maximum capacity.
Global Flight-Miles 2024 – 2026 (including 2020 Covid data for comparison)
During the first two weeks of May, airlines worldwide had to slash over 13,000 flights from their collective schedules due to a severe but thankfully short-lived jet fuel crisis. Some 60 days elapsed since the cessation of Gulf jet fuel exports before airlines were forced to react – reflecting in large part typical ‘well to wing’ supply chain delays. The crisis was swiftly averted by sourcing jet fuel from West Africa, the U.S. et al, the drawdown of local commercial stocks and coordinated emergency fuel-sharing and tankering deals.
Even in China, where suspicions naturally fell given its sharply reduced crude oil imports, 1H26 commercial freight and passenger traffic by road and waterways are up 3.2% and 1.2% year-on-year respectively. Similarly, 1H26 commercial freight and passenger trips by air are also up year-on-year, by 6% and 1% respectively.
It was China’s strategic reserves that took the hit, not domestic product demand.
Crude Inventories Are Depleted, But So Are Product Inventories
If global crude oil inventory levels were tight when the US/Iran MOU was signed mid-June, they are now dangerously thin since headline inventory levels mask operational limitations unique to each storage facility. OECD government oil stocks have continued to slide lower week by week, with the U.S. SPR little more than weeks away from breaching what many observers consider to be its operational floor of 280 – 300 mmbbls of residual storage.
Global refinery crude throughput fell from 85.7 mmbopd in January 2026 to an average of about 78 mmbopd in the second quarter before partially recovering by July. Global refinery crude throughput is currently down ca. 6 mmbopd year-on-year, driven primarily by Gulf feedstock shortages but also sustained Ukrainian drone strikes on Russian refining infrastructure, reportedly driving Russian refinery output to its lowest level in two decades.
With many refineries worldwide starved of crude oil feedstock and thus not keeping pace with robust end-user product consumption - jet fuel, diesel and gasoline product inventories must also have been heavily drawn upon over the last few months.
One doesn’t have to look much further than current record NYMEX 3-2-1 crack spreads to confirm the critical supply/demand imbalance within the downstream refining market.
The 3-2-1 crack spread, a clear measure of both refining profitability and product scarcity, has surged beyond the last record set during the Ukraine energy shock, signalling that refined products are increasingly harder to source than crude oil in physical markets.
NYMEX 3-2-1 Crack Spread
Amid robust global product demand, global crude oil feedstock scarcity, maxed-out refinery capacity and the consequent drawdown of product inventories will sustain historically high crack spreads for the medium term.
Replenishment Of Strategic Reserves Ultimately Adds To ‘Base’ Crude Oil Demand
The final piece of this complex oil supply/demand jigsaw, strangely overlooked by some in their future market balance estimates, is the obvious need to replenish strategic crude oil reserves worldwide. The CEO of Saudi Aramco spoke of this imperative during the company’s Q2 conference call in early August: ‘… if the Strait of Hormuz was to open today, it would take up to 18 months at an average rate of 2.1 mmbopd to replenish depleted [crude oil] inventories on top of [base] demand.’ – i.e. potentially up to 1.2 bnbbls in all.
Beyond mere replenishment, many Asian countries, badly hit by Gulf crude and product shortages, plan to build additional strategic oil reserves, adding further ‘fill’ demand once complete.
Just as governments will seek to rebuild their strategic reserves, so refiners will likewise seek to replenish their product inventories – driving further feedstock demand and thus additional incremental demand for crude oil.
In Conclusion – Crude Oil Prices Are Primed To ‘Flywheel’ To New Heights
We believe that the global oil market is far tighter structurally than forecast by the IEA and current benchmark oil pricing and the futures strip suggest. It is therefore highly probable in our view that crude oil prices are primed to ‘flywheel’ well beyond such recent highs given the growing scarcity of accessible crude and product buffer stocks, continued shortfalls in Gulf oil exports and robust ‘base’ global oil demand growth that will be boosted by additional ‘SPR restock’, ‘SPR newbuild/enlarge’ and ‘refined product restock’ oil demand.
The market’s Get Out of Jail cards are spent: OECD strategic crude and product inventories need to be rebuilt not further exhausted, and China is unlikely to bail out the global market once more at the expense of its albeit large strategic oil reserves.
Indeed, China’s crude oil imports bounced back to 8.5 mmbopd in July, still down 27% year-on-year but up from the 10-year low of almost 7 mmbopd in June. However, given the likely scale of its crude oil inventories - almost 1.4 bnbbls at year-end 2025 as estimated by the U.S. EIA - China is under no immediate pressure to rebuild its strategic reserves. As a demonstrable ‘swing buyer’, we would expect further adjustments in its crude oil imports, no doubt governed by prevailing market pricing.
All in all, market fundamentals as they stand today foreshadow an upcoming global oil crisis potentially far worse than that endured immediately after the breakout of Gulf hostilities in early March.
The vast inventory drawdowns that tempered the immediate impact of the Strait of Hormuz closure have merely ‘kicked the can down the road’.
Unless the global crude oil supply swiftly returns to pre-war levels, the only lever left in the toolkit is price. Oil pricing must rise to the point where enough global demand is ‘destroyed’ to once more rebalance the global oil market.
‘When oil prices diverge from physical fundamentals, the gap eventually closes. The only uncertainty is whether fundamentals catch up to price, or price catches up to fundamentals.’ Stephen Innes, Managing Partner, SPI Asset Management, June 2026.
Appendix
IEA ‘Oil Glut’ Narrative Dominated Headlines, Stoking Post-MOU Market Complacency
In our view, much of the market complacency witnessed in late June/early July post the MOU signing was anchored by the IEA’s well-publicized and long-held ‘oil glut’ thesis.
We believe this ‘oil glut’ narrative was misplaced, in large part due to the IEA’s systemic underestimates of global oil demand, a long-standing issue extensively researched and long discussed by Goehring & Rosencwajg, a NY-based global natural resources investment firm.
The dominant market sentiment through late 2025 into early 2026 was centred on the prospect of an impending ‘oil glut’. Indeed, Brent and WTI benchmark oil prices entered 2026 at ca. US$60/bbl, down some 20% year-on-year.
This narrative was largely led by the IEA which, from mid-2025 until the outbreak of military action in the Arabian Gulf, forecast significant global market surpluses for 2025 and 2026, first reported as 2.15 mmbopd and 3.7 mmbopd respectively in Feb 20261.
With such forecasts from a leading market observer, no wonder the level of bearish sentiment across oil markets worldwide in early 2026. After all, market surpluses of such magnitude would, if realised, deliver the largest glut ever observed in the global oil market.
Such bearish sentiments endure even now, despite the US/Iran war imposing a physical supply-side disruption without precedent in the entire history of global energy markets. As recently as June, the IEA still maintained that ‘… the market balance [will] shift to surplus towards the end of the year [2026]’!
Why does the IEA’s oil glut narrative matter? Firstly, judging by all the headlines, it clearly ‘made the weather’. Secondly, we need to establish the true ‘baseline’ for the oil market balance. After all, a structurally oversupplied oil market is obviously better able to cope with and recover from this unprecedented supply-side shock, hence the market complacency?
… So Let’s Examine The Data? Did A Large Pre-War Oil Glut Exist?
We remain unconvinced by the IEA’s assertions that the oil market was actually in a serious glut by year-end 2025 and that the oil market would revert back to a material surplus once the ‘dust settles’ and normal service resumes in the Arabian Gulf.
So, with apologies for all the math, let’s look at recently published IEA oil market data.
Just prior to the outbreak of the US/Iran war, the IEA’s Feb 2026 Oil Market Report estimated, as mentioned earlier, a global market surplus of 785 mmbbls or 2.15 mmbopd for 2025, yet directly reported OECD inventories grew year-on-year (y-o-y) by just 90 mmbbls or 0.24 mmbopd - just 11% of the overall market surplus imputed by the IEA.
So where did the vast majority of the ‘surplus’ barrels end up?
According to the IEA, y-o-y growth of oil-on-water accounted for an additional 250 mmbbls or 0.68 mmbopd while y-o-y growth of non-OECD inventories (principally China) accounted for a further 140 mmbbls or 0.39 mmbopd. We’ll return to these estimates later.
Finally, to reconcile its supply, demand and inventory estimates, the IEA simply assigns all the ‘missing’ oil barrels, 305 mmbbls or 0.83 mmbopd, to an ‘Unaccounted For’ category.
Such ‘Unaccounted For’ barrels, as we discuss later, represent 39% of the IEA’s first estimate, published in Feb 2026, of the entire global oil market surplus for 2025, and more than three-fold that of the annual growth of reported OECD inventories (90 mmbbls) - a clear case of the ‘tail wagging the dog’ in our humble view!
If we chart the IEA’s monthly 2025 global oil market estimates from Feb 2026 (when FY2025 data is first available) to May 2026 (the last OMR publicly available), we note that the IEA’s estimates of global oil demand for 2025 inexorably increase, month-by month, by over 0.4 mmbopd. With no material change in the IEA’s own global oil supply estimates over this timeframe, the oil market surplus has therefore shrunk in tandem by over 0.4 mmbopd.
With only minor adjustments to its OECD, non-OECD and oil-on-water inventories, the IEA’s ‘Unaccounted For’ barrels also necessarily shrink, month-by-month, by over 0.3 mmbopd.
Revisions of Global Oil Demand & ‘Unaccounted For’ Stock Changes, Feb - May 2026
Given the strong inverse relationship between the month-by-month changes to the IEA’s estimate of 2025 global oil demand and ‘Unaccounted For’ barrels, we would argue that those ‘Unaccounted For’ barrels are in large part latent barrels of oil demand - yet to be unearthed, measured and documented by the IEA!
In just four months, the IEA raised its 2025 global oil demand estimate by over 0.4 mmbopd, shrinking its estimated 2025 global oil surplus by 20% to 625 mmbbls or 1.7 mmbopd.
This is far from a one-off - as we mentioned earlier, Goehring & Rosencwajg’s extensive research has revealed that since 2010 the IEA has underestimated annual global oil demand in at least 12 of the last 15 years by 820,000 bopd on average (excluding COVID-impacted 2020) - an error margin that would rank as the 25th largest country by oil consumption!
This systemic bias toward underestimating oil demand (rather than a random error distribution) suggests that the IEA’s latest May ‘26 oil demand estimate will likewise also increase over time - further diminishing the IEA’s argument for an ‘oil glut’.
Key Global Crude Oil Inventory Measurements Are Fraught With Error
OECD inventories are probably the most rigorously tracked and reported inventories worldwide.
Yet, such well-monitored inventories can, as demonstrated in the IEA’s May 2026 analysis of global crude oil stock changes, end up merely playing a minor role.
The IEA attributes the vast majority of its latest 2025 stock changes to oil-on-water (39%) and non-OECD inventories (20%), while ‘Unaccounted For’ barrels still account for 30% of the IEA’s global oil market surplus, despite the Feb - May reduction described above.
Estimated 2025 Stock Changes in Key Global Inventories & ‘Unaccounted For’ Barrels
Given their clear dominance in ultimately determining the IEA’s imputed ‘oil glut’, how are these other stock changes derived?
Oil-on-Water: With impartial, direct measurements unfeasible across the entire 9,000-strong global fleet of oil tankers, oil-on-water inventory estimates rely heavily on AIS (Automatic Identification System) data and satellite algorithms to track tankers and estimate their capacity and current draft status. Satellite tracking limitations and ambiguous draft calculations introduce inherent errors to such estimates.
Shipping brokers and intelligence services alike estimate that the rapidly growing shadow tanker fleet, which ships sanctioned oil primarily from Russia, Iran and Venezuela, now comprises 1,300 - 1,600 vessels. According to recent analysis1, this shadow tanker fleet transported 18% of maritime crude oil cargoes, or 7% of global crude oil supply in 2025.
The rapid growth of the shadow fleet coupled with operators’ widespread tactics of AIS ‘spoofing’2, ‘dark’3 ship-to-ship transfers of crude oil on open seas and reflagging has no doubt introduced numerous additional errors within an already error-prone measurement.
Non-OECD inventories - the principal issues in estimating non-OECD inventories stem from a lack of transparent and timely reporting and opaque state-led strategic stockpiling. The IEA has allocated the vast majority (88%) of 2025 non-OECD stock changes to China. However, China views all crude oil and oil product stock levels as strategically sensitive and therefore publishes no inventory data whatsoever. All third-party estimates therefore depend on either remote satellite gauging (obviously blind to underground storage caverns) or proxy supply/demand imbalances (sensitive to ‘teapot’ refinery run rate and yield assumptions).
As of mid-2026, estimated Chinese crude inventories, strategic and commercial, likely stand at 1.2 - 1.4 bnbbls, potentially nearer the lower end after the recent drawdowns.
1 Middle East Institute
2 AIS ‘spoofing’ - the intentional manipulation of a ship's AIS data to broadcast false location, speed or identity
3 ‘Dark’ - a ship switches off its AIS system, preventing the broadcast of its location, speed, and identity
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