Middle East Hostilities Drive Sustained Oil and Fuel Market Tightness

Global oil supply remains significantly lower than pre-war levels, despite temporary rebounds that failed to offset structural deficits. OECD crude stocks have plummeted by 135 million barrels over the last two months, pushing U.S. storage facilities at Cushing, Oklahoma, toward critical operational limits. Andy Lipow, president of Lipow Oil Associates, warns that with inventories approaching bare-minimum levels, the market may soon face a scenario where only significant demand destruction can stabilize prices.

Fuel markets face an even more precarious outlook than crude. While crude oil trades at $84 per barrel—up 18% from pre-war levels—gasoline prices have surged by 32%. This disparity stems from a lack of refined product stockpiles, compounded by damage to Middle Eastern refineries and a Russian diesel export ban following Ukrainian drone strikes on key facilities. With Russia previously supplying 11% of global diesel, the loss of roughly 25% of its refining capacity exerts sustained upward pressure on global prices.

Economic dependence on these fuels makes government-led demand destruction a politically risky strategy. Consequently, authorities are likely to prioritize price controls, which prevents the market from self-correcting through natural consumption declines. As long as supply chains remain fractured and refining outputs stay suppressed, the era of higher-for-longer energy costs appears entrenched.