Key Points:
- Recovering crude shipments mask persistent supply constraints: Middle East exports have rebounded sharply, but overall production and refinery activity remain disrupted.
- Depleted inventories and rising security risks support crude: Low onshore stocks, renewed tanker attacks and exceptionally high freight costs keep Brent above USD 100.
- Diesel remains the main pressure point: Reduced Middle East refinery output and product exports have left diesel above USD 200 per barrel on both sides of the Atlantic.
- Normalisation will take time: The IEA warns that diesel shortages could persist well into 2027, while demand destruction is increasingly becoming part of the market's balancing mechanism
Recovering shipments mask a market still under strain
Brent crude continues to trade well above USD 100 per barrel despite a sharp recovery in Middle East oil shipments over the past month. At the same time, diesel prices on both sides of the Atlantic have climbed back above USD 200 per barrel equivalent, highlighting a growing disconnect between improving crude flows and the availability of refined products.
The explanation lies in the difference between crude oil being shipped, the total amount being produced, and the ability of the global refining system to turn that crude into the fuels consumers need.
Middle East crude exports have recovered to within striking distance of pre-war levels, helped by alternative shipping routes and efforts to restore production. However, recovering exports should not be mistaken for a return to normal market conditions. Total supply, including crude delivered to domestic refineries, remains substantially below earlier levels, while production disruptions in Russia have compounded the shortage.
In other words, more crude reaching international markets does not necessarily mean more oil is being produced. Some of the recovery reflects a redistribution of available barrels, including volumes that would otherwise have supplied regional refineries.
Depleted inventories and freight costs keep Brent supported
Another reason prices have remained elevated is the steady depletion of inventories. While more oil is now being transported by sea, onshore crude stocks continue to decline, leaving the market with a reduced buffer against further disruptions.
The International Energy Agency's (IEA) October Oil Market Report highlights the scale of the drawdown, with global observed inventories falling sharply since the conflict began. This helps explain why the recovery in shipments has yet to translate into sustained downward pressure on prices.
Meanwhile, the security situation remains highly uncertain. The frequency of attacks on tankers has increased significantly in recent weeks, while renewed strikes against Saudi Arabian infrastructure have raised questions about the sustainability of recovering flows.
Oil is moving, but at considerable cost and risk. Exceptionally high tanker freight rates have become an increasingly important component of the delivered cost of crude, particularly for Asian refiners sourcing supplies from distant producers.
This has provided additional support for Brent, and especially physical Dated Brent, which enjoys a distinct geographical advantage. North Sea crude can reach European refineries over relatively short shipping distances, making it increasingly competitive against supplies transported from more distant regions at exceptionally high freight costs. This advantage strengthens demand for nearby physical barrels, helping underpin the premium of Dated Brent over Brent futures while providing broader support for the benchmark itself.
Together, depleted inventories, elevated freight costs and persistent geopolitical risks explain why crude prices have remained stubbornly high despite improving physical flows.
Diesel above USD 200 exposes the real bottleneck
The clearest evidence that the market remains far from normal is the continued strength in refined products, particularly diesel. Both US ultra-low sulphur diesel and European gasoil futures have moved back above USD 200 per barrel equivalent, reflecting a shortage that additional crude exports alone cannot resolve.
The Middle East is not just a major crude-producing region. It is also a crucial global refining hub, supplying diesel, jet fuel and other products to markets around the world. While crude shipments have recovered substantially, refined-product exports remain severely constrained.
The IEA's latest report highlights the scale of the disruption, with Middle East product exports still less than half their pre-war levels. Diesel has been particularly affected, with reduced supplies from both the Middle East and Russia leaving importing regions competing for increasingly scarce barrels.
The Dallas Federal Reserve recently highlighted another important structural problem. Over the past several years, refining capacity has increasingly shifted towards Asia and the Middle East, while Europe and North America have seen significant closures. This has left consuming regions more dependent on imported fuels and increasingly vulnerable to disruptions at major refining centres.
Unlike crude oil, which can be redirected relatively easily if shipping is available, replacing lost diesel production is more complicated. Refineries elsewhere may have limited spare capacity, while their ability to increase diesel yields depends on crude quality, refinery configuration and competing demand for other products.
The result is exceptionally strong diesel refining margins, or cracks, with prices reflecting not just expensive crude but also the scarcity of refining capacity and finished products.
President Trump's agreement to allow imports of Russian diesel may provide some additional supply, but the quantities discussed are relatively modest compared with the broader disruption. At best, the agreement may slow further price increases rather than resolve the underlying shortage.
Outlook: Demand destruction becomes part of the solution
The IEA's October report underlines the increasingly uncomfortable outlook facing consumers. Global oil demand is contracting as high energy costs weigh on economic activity, transport and industrial consumption. Yet despite this demand destruction, the agency still expects supply to remain insufficient through year-end.
For crude prices to retreat sustainably, the market needs more than recovering Middle East shipments. It needs a restoration of total production, lower transportation costs and a rebuilding of depleted inventories. For diesel, the challenge is greater, requiring a sustained recovery in refinery operations and refined-product exports.
The IEA warns that diesel tightness could persist well into 2027, suggesting that relief for transport operators, industry and consumers may be slow to arrive.
The central message is that the global oil market is no longer dealing simply with a shortage of crude. It is facing a broader disruption to the production, refining and transportation system that connects producers with consumers. Until those bottlenecks ease, recovering crude exports may offer only limited relief, leaving Brent supported and diesel at the centre of the global energy squeeze.
Links:
IEA's October Oil Market Report
Dallas Fed: Refinery outages pumping up fuel prices more than cost of crude oil