Oil markets strain to plug the gap left by Middle East supply shortfall

Benchmark oil prices have once again been on an upward trend in recent weeks as renewed hostilities in the Middle East conflict have brought more disruptions to the region’s oil exports. Prices for crude and oil products had eased from their April peaks in the months that followed as emergency IEA stocks were released, Strait of Hormuz bypass routes boosted Middle East exports, producers outside the region raised output, flows out of the Persian Gulf partially recovered and global demand softened. But if Gulf supplies remain constrained in the coming months and commercial inventory buffers continue to deplete rapidly, higher prices and further demand reductions may be required to close the supply-demand gap.

Six months after the start of the Middle East conflict, oil production and exports from the Gulf remain heavily restricted. Flows through the Strait of Hormuz averaged only 7.6 mb/d in August, according to the latest data. That puts them 13.1 mb/d below pre-war levels, with cumulative export losses via the waterway approaching 2.8 billion barrels. However, implied and observed inventory draws have been significantly lower than the headline supply loss. IEA balances show a much smaller deficit of 2.2 mb/d in the second quarter of 2026 and 1.7 mb/d in the third quarter due to a number of offsetting factors.

Firstly, oil markets entered the crisis with ample supply and a surplus of more than 1 mb/d. As OPEC+ producers gradually unwound production cuts over the course of 2025, global oil supply exceeded demand by 1.4 mb/d on average last year, according to IEA balances. The surplus exceeded 2 mb/d in the second half of the year, resulting in significant stock builds, most notably in China.

As the crisis unfolded this year and shipping through the Strait of Hormuz was stifled, Saudi Arabia and the United Arab Emirates (UAE) quickly diverted what supplies they could to ports bypassing the Strait. Exports from Saudi Arabia’s Red Sea port of Yanbu and the UAE’s Gulf of Oman port of Fujairah rose from 4.1 mb/d in February to a high of 7.8 mb/d in June – before Houthi attacks in the Red Sea cut those flows back to 5.5 mb/d in August. Increased flows from these bypass routes have offset more than 500 mb, or 2.8 mb/d, of losses from the Strait of Hormuz since the start of the conflict. Attacks on the Saudi East-West pipeline that carries oil to Yanbu resulted in its shutdown in early September, curtailing bypass flows further.

At the same time as bypass flows have decreased, oil exports through the Strait of Hormuz have shown signs of increasing as US military support has facilitated transits through the contested waterway. Nonetheless, oil flows through the Strait remain below their pre-war levels.

Amid the losses of supply from the Gulf, producers outside it have raised output, adding a cumulative 420 mb, or 2.3 mb/d of oil supply, since the start of the war. Substantial gains between February and August came from the United States (+520 kb/d), Brazil (+470 kb/d), Kazakhstan (+440 kb/d), Venezuela (+300 kb/d) and Nigeria (+200 kb/d) – while global biofuels supply rose seasonally by 890 kb/d over the same period.

Supply-side adjustments have been reinforced by an equally important demand response. Overall, we estimate that global oil demand over the past six months has averaged 5.8 mb/d less than in February, which equates to a cumulative demand reduction of more than 1 billion barrels.

China has seen the largest decrease, with oil imports, refinery activity and product deliveries significantly lower than before the start of the war. Apparent Chinese demand over the past six months ran 1.7 mb/d below February levels and 1.1 mb/d lower than the same six-month period a year earlier. Chinese seaborne crude oil imports plunged from 11.5 mb/d in February to a low of 6 mb/d in June, easing the pressure considerably for other crude importers in Asia.

End-user demand reductions have also been mounting in other markets. Notable declines have been seen in the Middle East where petrochemical operations and aviation have been restricted. Some governments, notably in Asia, have implemented fuel rationing and emergency conservation policies, while product supply shortfalls and higher prices have cut consumption in other countries.

Global oil demand fell by 5.3 mb/d year-on-year in the second quarter of 2026, the first quarterly decline since the Covid pandemic. Gasoil was the main driver of the decrease, down by 1.2 mb/d year-on-year, alongside a drop of 1.8 mb/d in deliveries of naphtha, LPG and ethane combined. For the year as a whole, global oil demand is now expected to contract by 2.5 mb/d, with the Middle East and Asia accounting for 80% of the decline.

Even after these supply and demand adjustments, global oil inventories have been drawing at record rates of 2.8 mb/d over the past six months. Observed oil stocks are now 507 mb lower than they were at the onset of the war, with IEA Member countries having released more than 300 mb of emergency stocks as part of the historic collective action announced on 11 March. Non-OECD crude oil inventories accounted for 105 mb of the decrease, of which 65% came from above-ground tanks in China, with the remainder largely stemming from lower oil on water volumes.

With inventory buffers rapidly depleting, the urgency of fully reopening the Strait of Hormuz and bypass routes is increasing. Any further disruptions that prevent a full recovery in production and exports will have major impacts on markets across the world.