Crude Oil and Refined Product Markets Weigh on Global Supply, Demand

Written by John Egan for IIR News Intelligence (Sugar Land, Texas)

Summary

Wars in the Middle East and Europe continue to cut into global production of crude oil and refined petroleum products as well as demand for those products. Refinery crack spreads have hit record levels, which has eroded demand, according to the International Energy Agency's August Monthly Oil Report.

Volatility Continues to Grip Global Oil Markets

Global crude oil markets faced fresh uncertainties this week following President Donald Trump's weekend announcement that the U.S. has secured preferred access to 65 billion barrels of Venezuelan crude oil and the exchange of attacks between the U.S. and Iran in the Middle East.

As the week got underway, there were more questions than answers about the president's claim last Friday that a massive U.S.-Venezuelan crude deal would sharply lower gasoline and diesel prices. Details about the purported deal were murky, but its announcement reportedly triggered a raft of protest inside Venezuela, as it would overturn decades of that country's resource nationalism. For more on this fluid situation, see August 31, 2026, article, U.S. Companies Scouring for Deals for Venezuelan Oil.

Trump's announcement said some portion of the Venezuelan crude would be used to refill the U.S. Strategic Petroleum Reserve (SPR), but operational questions soon emerged about whether and to what degree Venezuela's various grades of crude could be incorporated into the SRP's salt caverns along the Gulf Coast.

Also, Trump's announcement glossed over what experts said was an oil infrastructure that ranged from dilapidated, in cases where assets exist, to non-existent in many areas. Some estimates have said it would take as much as US$180 billion over a prolonged period of time to build or repair that country's oil infrastructure.

As well, the president was silent about the violence and lawlessness that has deterred most other companies away from operating in that South American country.

In any case, Trump's aspirations for Venezuelan crude oil seem unlikely to contribute to a near-term solution for a tightening U.S. and global oil markets. Further tightening could be triggered after the U.S. and Iran traded missile and drone attacks over the weekend, which on Monday pushed up crude oil prices by about 3%. In early Tuesday trading, crude was up another 3%.

Global Oil Supply Tightening

Before last weekend's developments, the International Energy Agency (IEA) noted that global crude oil markets had tightened during the third quarter, though the tightening was less pronounced than it was in the second quarter, shortly after the conflict with Iran began.

The IEA's Monthly Oil Report (MOR), released August 12, said that although global oil supply rose by 2.4 million barrels per day (bpd) to 101.5 million bpd in July, it was about 6.3 million bpd below year-ago levels. Approximately 8.3 million bpd of Persian Gulf output was still shut in at the time of the report, a figure not likely to have changed significantly since the report was issued.

"Renewed hostilities and maritime disruptions in July and early August undermined the (market's) recovery efforts, reducing projected third-quarter 2026 oil supply by 1.7 million bpd compared with (IEA's July MOR). Global oil supply is now projected to decline by 4.3 million bpd on average in 2026 and rebound by 8.3 million bpd next year to 110.3 million bpd," the Paris-based energy agency said. IEA's 2026 projection assumed that crude oil will once again flow through the Strait of Hormuz, through which about 20% of the world's oil and natural gas move.

Persian Gulf oil production is inching up, increasing about 3.7 million bpd in June and a further 2.5 million bpd in July, to reach roughly 23.9 million bpd, but that is still 8.3 million bpd below pre-war levels. The IEA said regional exports, including routes bypassing the Strait of Hormuz, fell by a sharp 2.1 million bpd to 15 million bpd after the key passageway was effectively closed again in early July and oil infrastructure and tankers came under attack. Loadings peaked at 20 million bpd at the start of July but dropped to around 12 million bpd later in the month.

Because the U.S. and Iran remain at loggerheads over the reopening of the Strait, and Iran-backed Houthi rebels have hindered passage through the Bab el-Mandeb, on the southwest side of Saudi Arabia, the agency said it was again lowering its global crude oil supply projections for the rest of 2026. It estimated that global oil supply will fall 4.3 million bpd in 2026, to 102 million bpd. A 1.4 million bpd increase in production from the U.S. only partly offsets production losses in the Middle East and Russia.

Higher Prices, Supply Interruptions, Cut into Demand

The IEA said that global demand for oil is expected to decline by 1.6 million bpd in 2026, 510,000 barrels per day (kb/d) more than it estimated in July, as the ongoing closure of the Strait of Hormuz and elevated fuel prices continue to depress oil consumption.

Global oil demand is now expected to decline by an average of 1.6 million bpd for all of 2026. Demand fell about 4.9 million bpd in the second quarter and is in line to drop another 2.8 million bpd in the third quarter before flipping to growth of 580,000 bpd in the October-December period. Demand is expected to increase roughly 2.4 million bpd in the January-March 2027 period compared to the year-earlier quarter.

By the Numbers

• 101.5: Global oil production in July, in million barrels per day (bpd), an increase of roughly 2.4 million bpd from June but still about 6.3 million bpd lower than year-earlier production, according to the IEA's August "Monthly Oil Report."
• 1.6: Decreased worldwide demand for oil for all of 2026.
• 290: Million barrels of oil held in the U.S. Strategic Petroleum Reserve, down from roughly 415 million barrels a year ago.

Stockpiles, Oil on Water, Continue Dropping

For the most part, nations met any shortfall in supply during the third quarter by drawing down their national petroleum reserves, though there is a limit to how long that can continue. The U.S. SPR is at its lowest level in four decades, about 290 million barrels. Prior to the Middle East conflict that began February 28, the SPR held about 415 million barrels. The reserve can hold about 700 million barrels.

At the time of the IEA oil report, total worldwide observed oil stocks were just below 7.9 billion barrels, down about 410 million barrels since the start of the war That worked out to a fall of about 2.7 million bpd, IEA said.

Refined Product Crack Spreads Boost Prices, Profitability

The second-quarter earnings reports of stand-alone refiners, and the downstream businesses of integrated oil majors, showed stronger profits compared to the year-earlier period. Tighter light and middle distillate markets boosted refinery cracks and margins in the Atlantic Basin to record highs. That trend looks to continue in the third quarter.

Some of that increased profitability stemmed from a reduced throughput of crude oil, IEA said: In July, the world's refineries processed about 80.9 million bpd, approximately 5 million bpd less oil than they did last July. The Paris-based energy agency said continued Middle East product export disruptions and attacks on Russian refineries will reduce third-quarter 2026 refinery runs by about 370,000 bpd. It added that global refinery throughput was projected to decline by 2.5 million bpd on average in 2026 before rebounding by 3.5 million bpd in 2027.

In July, attacks on Russian refineries and Middle East conflict-related outages led to the highest level of global unplanned refinery outages since the pandemic, according to Industrial Info Resources. Those unplanned outages are on track to remain elevated in August.

In the U.S., gasoline prices averaged US$4.08 per gallon on August 31, about 90 cents per gallon or 28% higher than a year ago, according to the American Automobile Association. Diesel is retailed for an average of US$5.60 per gallon across the country, 51% or US$1.90 per gallon higher than a year ago.

"Increasingly tight product markets pushed Atlantic Basin refining margins to all-time highs in July as diesel, jet fuel and gasoline cracks surged amid seasonally higher demand, supply shortfalls and depleted stocks," the IEA report said.

Key Takeaways

• Wars in the Middle East and Europe continue to roil global crude oil and refined product markets.
• Production is slated to decline for the year and demand also will trend down, a victim of higher prices and reduced availability.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, Industrial Info Resources is tracking over 250,000 current and future projects worth $30.2 trillion (USD).