Oil Market Report - October 2026

• World oil demand is forecast to fall by 2.5 mb/d y-o-y in 4Q26 and 2.6 mb/d on average in 2026. As the Iran war manifests itself through restricted product availability, soaring fuel prices and a deteriorating economic outlook, diesel will register 25% of the drop. A partial recovery, of 2 mb/d, will leave 2027 global oil use 620 kb/d, or 0.6%, below 2025 levels.

• Global oil supply increased by 2.5 mb/d m-o-m to 102.3 mb/d in September, driven by Gulf producers. OPEC+ gains of 2.1 mb/d were led by Saudi Arabia, while the UAE drove non-OPEC+ increases. Oil supply is projected to post an average annual decline of 5.8 mb/d, to 100.7 mb/d, this year, before reversing course and rising by 7.7 mb/d in 2027. Renewed attacks in the Gulf leave the recovery fragile.

• Global refinery runs are set to hit a seasonal low of 81.3 mb/d in October before rebounding to 84.6 mb/d by year-end. Record freight and crude costs crushed margins in Europe and Asia, while discounted feedstocks propelled US margins to new highs. Global runs will drop by 2.3 mb/d, to 81.7 mb/d, this year, and rise by 2.8 mb/d in 2027.

• Diesel markets remained under significant strain as prolonged supply disruptions forced counter-seasonal stock draws ahead of autumn refinery maintenance and peak winter demand. Global diesel exports in September were 700 kb/d lower y-o-y, as a 1.3 mb/d loss from Russia and the Middle East was only partly offset by higher supply from other sources.

• Global observed oil inventories edged down by 10 mb in September as a further 113 mb decline in on-land stocks was largely offset by a surge in oil on water. Non-OECD crude stocks slumped by 76 mb, with China accounting for 78% of the decline, while OECD inventories dropped by 37 mb. Global stocks were 509 mb (-2.4 mb/d) lower than at end-February.

• North Sea Dated crude soared by $26.17/bbl m-o-m to $116.89/bbl in September, as renewed Middle East hostilities disrupted supplies and Asian refiners accelerated purchases. The 11 September bombing of the Saudi East-West Pipeline and an exponential rise in freight rates compounded the rally. At the time of writing, Dated was trading around $134/bbl.

A recovery in Middle East oil supply was well underway in September, with Gulf crude oil exports approaching pre-war levels. However, the recent escalation in attacks on regional energy infrastructure and tanker traffic is threatening to derail further gains. At the same time, record tanker rates raised crude delivery costs and eroded refinery margins. Brent crude futures have risen by 13% since the start of September to around $107/bbl. Physical markers have increased much more, with North Sea Dated up by 43% to $134/bbl and other North Sea grades trading up to $160/bbl.

Crude oil exports from Gulf producers, led by Saudi Arabia, surged by 4.4 mb/d to 13.9 mb/d in September, reaching over 75% of pre-war levels as supply recovered strongly and inventories were drawn down. Robust Gulf of Oman ship-to-ship transfers helped lift total oil flows through the Strait of Hormuz by 3.7 mb/d to 10.9 mb/d, while the swift return of East-West pipeline flows increased overall bypass exports by 970 kb/d to 5.6 mb/d. The strong rebound raised estimated global supply for 3Q26 by 190 kb/d compared with last month’s Report. However, due to heightened security concerns amid increased Houthi attacks in the region in October, we have left the projections for the remainder of the year largely unchanged. As such, global oil supply is expected to average 101.4 mb/d over the second half of the year, up from 96.4 mb/d in 2Q26.

Refined product and LPG shipments from the Middle East have risen much more slowly than crude oil flows and remain below half of their pre-war levels. Refined products rose by 210 kb/d to 1.9 mb/d in September, while LPG increased by 90 kb/d to 670 kb/d – from pre-war levels of 4.7 mb/d and 1.5 mb/d, respectively. Continued disruptions to Middle East exports, compounded by lower supply from Russia and some Asian countries, cut global diesel/gasoil availability by 1.5 mb/d in 2Q26 and 1.7 mb/d in 3Q26 compared with a year earlier, putting diesel markets under extreme pressure.

While global diesel prices have eased from the all-time highs of more than $200/bbl reached in September, benchmarks remain nearly double the price of crude oil and their pre-crisis levels. Record diesel prices are already having broad economic consequences by raising the cost of goods and impacting real incomes, economic activity, and inflation. Following year-on-year contractions of 5 mb/d in 2Q26 and 3.7 mb/d in 3Q26, global oil demand is set to decline by 2.5 mb/d in 4Q26. This is forecast to result in an annual drop in global demand of 2.6 mb/d, to 102.4 mb/d, as high prices and a deteriorating economic outlook in some countries weigh on consumption.

Despite lower demand, oil market balances are forecast to remain in deficit through the end of the year, with constrained middle distillate supplies likely to persist well into 2027. Global observed oil stocks edged down in September, as a 103 mb surge in oil on water amid a sharp rise in Gulf exports was more than offset by a further 113 mb decline in on-land inventories. Cumulative global observed inventories were a steep 509 mb below pre-war levels by the end of September, with on-land stocks hovering at their lowest levels since at least 2016. As the remaining buffers in the system continue to erode, in the absence of a resolution to the conflicts in the Middle East, oil markets may experience more turmoil in the months ahead before any eventual surplus emerges in 2027.

Global gasoil markets tightened counter-seasonally in 3Q26, as prolonged disruptions to Middle Eastern and Russian exports forced stock draws. Combined with much heavier-than-normal inventory declines in 2Q26, this has deprived global gasoil markets of crucial stock cover ahead of the peak winter demand season. Higher prices have weakened demand as consumers deferred price-sensitive heating oil purchases. Conversely, relatively price inelastic diesel demand has remained strong, supported by government measures aimed at easing the impact of high prices on consumers. Falling inventories, soaring cracks, and steepening levels of backwardation have signalled the need for additional supplies. However, even with a rapid recovery expected in refinery throughputs into year-end, gasoil supply falls short of meeting demand in 4Q26, suggesting that the replenishment of lost inventories, outside of typical seasonal fluctuations, is unlikely before 2H27.

Wholesale diesel prices exceeded $200/bbl in Singapore in mid-September and reached all-time highs of around $220/bbl in Europe and the United States. Retail diesel prices have risen in tandem to record levels in most major economies. Higher product prices relative to those of crude led to exceptionally strong refinery margins in 3Q26, as record Atlantic Basin diesel and jet fuel cracks offset the drag from heavily negative fuel oil and naphtha cracks. However, as freight rates soared and the delivered cost of crude rose sharply in September, diesel cracks for European refiners dropped back from $100/bbl to close to $60/bbl by early October (see Surging Freight Rates Cut into Refining Profitability). As tensions in the crude freight market have spread to other tanker categories, delivered diesel prices in the dominant gasoil importing markets – Europe, Africa and Latin America – could rise again in the coming weeks.

Global diesel demand is deeply intertwined with economic activity, rendering it relatively price inelastic. Nevertheless, sky-high prices, combined with a deterioration in the economic outlook in several countries, have reduced deliveries. A drop of 1.1 mb/d y-o-y in 2Q26 to 28.5 mb/d – with China and Europe accounting for the lion’s share of the decline – was followed by a contraction of 750 kb/d y-o-y to 28.7 mb/d in 3Q26. Gasoil deliveries outside the transport sector have weakened markedly since the onset of the war, with consumption in OECD countries falling by 8% y-o-y in the five months to July. Conversely, OECD diesel deliveries fell by just 2% across the same period. But while the deferral of heating-related purchases has slowed other gasoil demand to date, tanks must be filled ahead of the Northern Hemisphere winter. Even so, gasoil demand’s year-on-year contraction is forecast to accelerate to 1 mb/d in 4Q26.

Since the start of the Middle East conflict, gasoil supply has contracted sharply following reductions in Middle East refinery activity and lower product exports from Asia. Global gasoil production decreased to an average of 26.4 mb/d in 2Q26, 1.5 mb/d lower than a year ago, while 3Q26 output is estimated to have dropped by 1.7 mb/d y-o-y to 27.2 mb/d. The concurrent loss of Hormuz crude flows significantly lowered refinery runs in Asia, cutting gasoil output in 2Q26, particularly in China, India and Korea. Amplifying these losses, Russian gasoil production and exports have slumped in recent months due to increasing damage to refineries from Ukrainian drones (see September OMR, Russian Refining System Resiliency Degraded by Ukrainian Attacks). Furthermore, tight jet fuel markets this summer encouraged refiners to maximise kerosene production, thereby reducing gasoil yields. Finally, crude market supply disruptions have necessitated refineries to process crude grades that are suboptimal for their configurations, as access to preferred feedstocks has been restricted.

Reduced refinery output sharply lowered global gasoil exports to an average 4.7 mb/d over the first nine months of 2026, 10% below year-earlier levels. Preliminary trade data show flows falling to 4.7 mb/d in September, nearly 700 kb/d below a year ago. Combined net exports from the Middle East and Russia dropped by 1.3 mb/d to 820 kb/d in September, down more than 60% y-o-y. While the United States and China increased exports by 610 kb/d compared with year-earlier levels, volumes fell by 150 kb/d from their August peak, failing to offset the Middle East and Russia losses.

With supply losses outpacing weaker demand, inventories have continued to decline. Total OECD gasoil stocks drew counter-seasonally to 565 mb in July, down 5% from pre-conflict levels and their lowest level since November 2023 when inventories were still being replenished following the 2022 energy crisis. The global gasoil balance is estimated to have tightened by around 100 kb/d in 3Q26, compared with last year’s build of 880 kb/d and the five-year average of +300 kb/d ahead of the Northern Hemisphere heating season. Inventory draws are projected to accelerate in October as demand rises seasonally while the refining system undergoes regular maintenance work. The recent tightening of crude markets and record freight rates have crushed refining margins outside North America. Any further deterioration in refinery profitability could prompt economic run cuts at marginal refineries in Asia and Europe, increasing market tightness before the end of the year.

The projected recovery in refinery runs towards year-end should almost keep pace with the more cautious 4Q26 demand forecast. However, the outlook remains fragile, and any unexpected disruptions, such as a late-season US Gulf Coast hurricane, could further tighten the market. The recently announced easing of Russian diesel export restrictions is unlikely to materially alter the global gasoil market balance as the current export constraints stem from a lack of operational Russian refinery capacity. Concerns of possible disruptions to Chinese product exports, which have been a key source of supply to Asian markets in 3Q26, were alleviated by the resumption of government licence issuance in recent days.

Higher global refinery output will return the gasoil/diesel market to a surplus in 1Q27, lifting stocks broadly in line with normal seasonal patterns. However, this will be insufficient to offset the deficit accumulated during 2026. As a result, the gasoil market balance will remain tight well into 2027 and is dependent on a recovery of product supply from the Middle East. Failing this, further demand reductions and the heavy economic costs these will entail may be needed to balance markets.

Against this challenging backdrop, on 2 October, G7 leaders announced their commitment to accelerate the delivery of the agreed volumes under the IEA Collective Action of 11 March, with the priority on the speedy release of diesel supplies to the market in the coming weeks.