Oil Prices Held Below $100 by Demand Concerns Despite Severe Mideast Supply Disruptions

Global oil benchmark Brent crude has rallied but remains below the key psychological threshold of $100 per barrel, despite escalating conflict between the U.S. and Iran severely curtailing exports from the Persian Gulf. A combination of resilient, albeit reduced, supply flows, rising non-OPEC production, and significant demand weakness is keeping a lid on prices.

A Mixed Supply Picture

Crude shipments from Middle East producers have fallen to approximately 11 million barrels per day (bpd), down from 18 million bpd before the conflict intensified seven months ago, according to data from Argus. However, a meaningful volume of oil is still transiting the volatile Strait of Hormuz.

While flows have dropped below 2 million bpd on some days, the daily moving average remains around 4 to 5 million bpd, a level that supports a "fair" price of $95 for Brent, according to Claudio Galimberti, Chief Economist at Rystad Energy. Gulf producers have also been adept at finding alternative export routes and utilizing ship-to-ship transfers to mitigate shortfalls. Meanwhile, non-OPEC producers, including the U.S., Canada, and Guyana, are expected to increase output by a combined 1.4 million bpd this year, partially filling the supply gap.

Demand Destruction Weighs on the Market

A significant factor capping prices is weakening global demand. Demand destruction in petrochemicals and transportation fuels is estimated at 3.5 million bpd in the third quarter, according to Rystad. China, the world's top importer, accounts for more than half of this decline due to rising transport electrification and a shift to coal-based chemicals.

Ad

China has slashed its seaborne crude imports to 7 million bpd in July and August, a sharp drop from over 11 million bpd in February. The market is also finding comfort in Beijing's vast strategic reserves, which Kpler estimates at 1.17 billion barrels.

Physical Markets Signal Underlying Tightness

While benchmark futures trade below $100, physical oil markets are telling a different story, pointing to acute tightness. "At the moment, it’s telling us that physically things are incredibly tight," said David Fyfe, chief economist at Argus. Spot premiums for Middle Eastern grades like Dubai and Oman have rebounded sharply, with cargoes trading at $19 to $20 a barrel above benchmark quotes.

Reflecting this tightness, Oman futures were trading at $104.54 a barrel and cash Dubai at $105.10 on Monday, according to Reuters data. The diesel market, in particular, is "screaming shortage," with prices hitting record highs in the United States. This has led several banks, including Morgan Stanley and Goldman Sachs, to raise their price forecasts, with Morgan Stanley now expecting Brent to average $100 a barrel in the fourth quarter.