July 22, 2026 — 11:57am
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A new front has opened in the war in the Middle East, global oil and refined product inventories are tumbling and oil and gasoline prices are spiking again. So much for all that winning.
After the 60-day ceasefire agreement was signed by the US and Iran last month and the Strait of Hormuz reopened, shipments of crude oil from the Gulf recommenced and oil and gasoline prices fell sharply, with Brent crude trading (briefly) below $US70 a barrel.
Maritime traffic through the Strait of Hormuz has ground to halt yet again, raising concerns about another supply shock.AP
The oil market, which had been helped by the release of about 300 million barrels from strategic reserves and China’s halving of its imports, appeared to be recovering rapidly. Global oil inventories rose by 21 million barrels in June, the first increase since the outbreak of the war in February.
The breaking down of the ceasefire late last month initially had only a modest impact on oil prices, which edged up towards, and then above, $US80 a barrel as the hostilities resumed and intensified.
On Monday, however, with the Strait of Hormuz effectively closed again, the Iran-aligned Houthis sent an email to most of the world’s major shipping companies, threatening to attack ships attempting to export oil from Red Sea ports via the Bab al-Mandeb strait.
The oil shock definitely isn’t over and, indeed, with no obvious way for the US to gracefully retreat from the conflict it chose to start, the real shock might just be getting underway.
The Saudis have been using their pipelines and their port at Yanbu to ship about 4 million barrels a day – compared with only about a million barrels a day before the war broke out – via the Red Sea, with about 2.5 million barrels a day heading south, via the strait, to Asian buyers and the rest travelling the far longer route via the Suez Canal (which can’t handle the larger tankers) at the northern end of the sea.
The oil price immediately broke through $US90 a barrel.
The world is now far more vulnerable than it was in the earlier phase of the war.
The International Energy Agency’s July oil market report said that about three quarters of the 400 million barrels of strategic oil reserves that its members agreed to release in March have been released. What’s left of that commitment could be exhausted within weeks.
The ceasefire did produce a surge in oil “on the water” for the first time since February, but it also produced a revival in demand, which had previously been reduced as the war pushed up prices.
Both OECD and non-OECD oil stocks fell again last month – by a combined total of roughly 100 million barrels – and America’s strategic reserve has fallen to its lowest level in more than 40 years.
More threatening is the position in refined products. Businesses and consumers don’t consume oil, but its derivatives like petrol, diesel jet fuels and fertilisers.
The margins on refined products hit four-year highs earlier this month even when crude was trading just above $US70 a barrel. Exports from the Persian Gulf of refined products were less than half their pre-war levels last month even as crude flows were running at about 75 per cent of pre-war levels again.
That disparity is partly due to the combination of Iranian attacks on Middle East refineries and the depletion of their inventories. But stocks have also been hit by the success of Ukraine’s targeting of Russian refineries and oil industry infrastructure, which has forced Russia – previously the world’s second-largest exporter of diesel -- to not just to halt exports of diesel refined products, but to start importing them.
That has subtracted supply and added demand to the market for refined products, as has a shift in China’s energy security strategy.
During the war, China nearly halved its imports of crude, taking about 5 million barrels a day of demand out of the market, while restricting exports of refined products.
With a strategic reserve of its own estimated at more than 1.2 billion barrels, it was better positioned than any other economy to ride out the war. With the ceasefire, however, it resumed purchases of oil to rebuild its depleted reserve.
The released strategic reserves and China’s withdrawal from the market are probably the two major factors in oil prices failing to reach the $US150 a barrel prices that were predicted early in the conflict, which the IEA had described as the biggest energy shock in history. The price peaked at about $US126 a barrel in late April.
An oil tanker struck by the Houthis in the Red Sea in 2024. The rebel group is threatening to strike tankers attempting to export oil from Red Sea ports via the Bab al-Mandeb strait.AP
Those buffers, however, have been run down and, with the Strait of Hormuz again closed and the Houthis threatening to shut down traffic through the Bab-el-Mandeb choke point, supply is under an even more significant threat than it was during the first phase of the conflict.
The most acute threat to the global economy remains the supply of refined product.
Gasoline and diesel inventories around the world are at or close to record lows – US diesel stocks are, for instance, at 20-year lows and gasoline stocks at their lowest level since 2012 –- and global refining output, which didn’t surge like crude oil flows during the ceasefire, is around 5 million barrels day lower than it was a year ago.
The US had boosted exports of refined products to record levels (with record profits for US refiners) as Middle East supply fell away, but the rundown in domestic stocks has seen its refiners’ output redirected to the domestic market, with export volumes falling back quite sharply.
With no obvious ability to bring back refined product supply to pre-war levels quickly while the conflict continues – the damaged refineries in the Middle East and Russia will take months, at least, to repair and ramp up their output – it is demand destruction, driven by price spikes, that will have to drive a rebalancing of the supply-demand equation.
Ominously for Republicans facing mid-term elections in November, US petrol prices rose back above $US4 a gallon this week. This time last year, the average US petrol price was $US3.14 a gallon. Diesel is selling at about $US5.14 a gallon compared to $US3.72 a year ago.
The oil shock – and more particularly the downstream effects of that shock on refined product prices and supply – definitely isn’t over and, indeed, with no obvious way for the US to gracefully retreat from the conflict it chose to start, the real shock might just be getting underway.
That has implications for global economic activity and for inflation rates around the world.
The drop in the US inflation last month from 4.2 per cent to 3.5 per cent as the ceasefire took hold and oil and gasoline prices fell illustrated how significant the impact of the war has been on businesses and households.
“We’ll take care of it”: Donald Trump says he isn’t worried about the escalation and broadening of Middle East hostilities,AP
Donald Trump, of course, says he isn’t worried about the escalation and broadening of Middle East hostilities, even as he professed no interest in re-starting negotiations with Iran.
And if the Houthis do close the Red Sea? “If something like that happens, we take care of it, ” he said.
The US has done such a great job of taking care of the Strait of Hormuz that less than a handful of tankers is now risking the passage each day.
“If we left tomorrow, we had a big, we had a big success. But we’re not leaving tomorrow,” Trump said this week.
Trump defines success and winning differently to the rest of us. Every day that the two straits remain closed and oil and refined product prices stay elevated underscores how unsuccessful – and humiliating – America’s excursion to the Middle East has been, and how costly it is - not just for the US, but for the rest of the world.
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