Today Markets Analysis: WTI crude oil prices retreated on Friday following Thursday’s sharp 6.7% rally, as traders weighed deteriorating global demand expectations against mounting concerns over Middle East supply disruptions.

October WTI crude oil futures (CLV26) closed $2.43 lower, or 2.37%, while October RBOB gasoline (RBV26) fell 8.60 cents, or 2.53%.

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IEA Raises Deficit Forecast Despite Demand Weakness

The International Energy Agency (IEA) warned Friday that high oil prices and restricted supply are expected to produce the largest annual decline in global oil demand since the Covid-19 pandemic.

However, the IEA simultaneously raised its forecast for this year’s global oil deficit to 1.7 million barrels per day, up from its previous estimate of 1.3 million bpd.

The agency attributed the widening deficit to supply restrictions associated with the ongoing US-Iran conflict, while also pushing back its forecast for the return of a global oil surplus until 2027, later than its previous projection for late 2026.

That combination of weaker demand and tighter supply is creating an increasingly volatile fundamental environment for crude markets.

Middle East Conflict Keeps Supply Risk Elevated

Geopolitical risk remains one of the strongest supportive factors for crude oil.

Reports indicated that two ships were struck by unidentified projectiles near Oman on Thursday, with Iran reportedly considered a possible source. Tehran has also warned that it is prepared for a more intense conflict and could escalate retaliatory attacks if the US continues targeting Iranian territory and infrastructure.

The possibility of a prolonged conflict that restricts crude production, exports or shipping routes across the Middle East continues to underpin oil prices.

Yemen’s Houthi rebels are adding another layer of risk after targeting Saudi Arabian energy infrastructure, forcing several oil facilities to suspend production.

Saudi Arabia reported Thursday that August crude production fell to 6.238 million bpd, its lowest level since 1990.

Red Sea Shipping Risk Increasing

The Houthi takeover of the strategic Red Sea port city of Mokha has further increased concerns surrounding regional shipping.

Mokha lies approximately 50 miles from the Bab al-Mandab Strait, a critical maritime chokepoint connecting the Red Sea with the Gulf of Aden.

With the Strait of Hormuz closed, Saudi Arabia has increasingly relied on Red Sea routes for crude exports. However, escalating Houthi activity over the past two months has disrupted that alternative export corridor.

The combination of Hormuz disruption and increased Red Sea risk has created an unusually significant transportation threat for global oil markets.

Global Supply Tightening

Vitol Group said global oil markets are continuing to tighten, estimating that approximately 2 million bpd of Middle Eastern crude exports have been lost, with another 2 million bpd affected in Russia following Ukrainian drone attacks.

Data compiled by Bloomberg, Kpler and Vortexa indicated that Saudi Arabia’s August crude exports fell to approximately 3 million bpd, the lowest level in nine years.

These developments provide an important counterbalance to concerns over weakening global demand.

Israel-Iran Conflict Adds Further Risk

Crude oil prices are also supported by the possibility that Israel could become more directly involved in the US-Iran conflict.

Israeli Defense Minister Katz warned last Thursday that an Iranian attack on Israel would remove existing restrictions on Israel’s response against the Iranian regime.

Israel has simultaneously intensified attacks against Iran-backed Hezbollah in Lebanon, while continuing military operations against Hamas in Gaza.

The continued expansion of regional hostilities reduces the likelihood of a rapid resolution and could delay the reopening of the Strait of Hormuz.

Russian Oil Production Under Pressure

Ukraine’s intensified drone campaign against Russian energy infrastructure is also reducing Russian crude production and processing capacity.

According to EA Analytics, Russian crude-processing rates averaged 3.51 million bpd in July, the lowest level in 24 years, following damage to energy infrastructure from Ukrainian drone and missile attacks.

Secondary-source estimates published by OPEC showed Russian crude production falling to 8.89 million bpd in July, a six-year low.

Russia is also experiencing domestic fuel shortages. Reuters reported on August 28 that Russian gasoline production had fallen to approximately 80,000 tonnes per day in August, equivalent to only around 70% of domestic demand.

The disruption represents another potential source of tightening in global refined-product markets.

OPEC+ Supply Increases Provide a Bearish Counterweight

Despite the geopolitical risks, OPEC+ supply policy remains a bearish factor.

OPEC delegates approved their final planned production increase of 188,000 bpd for September on August 2.

The increase completes the restoration of the 1.65 million bpd supply reduction introduced in 2023, with the group indicating that production should remain broadly steady for the remainder of the year following the September increase.

However, actual production may struggle to reach planned levels while military attacks continue to disrupt oil infrastructure across the Middle East.

OPEC crude production fell by approximately 900,000 bpd in August to 19.91 million bpd, highlighting the difference between official production targets and actual supply availability.

Tanker Storage Falls

Vortexa reported Monday that crude oil stored on tankers that had remained stationary for at least seven days fell 16% week-on-week to 92.64 million barrels during the week ending September 4.

The decline suggests that some previously stranded crude is moving back into the market, although the broader disruption to Middle Eastern shipping remains a significant concern.

US Inventories Provide Mixed Signals

Thursday’s EIA report was broadly bearish for crude oil and refined products.

US crude inventories declined only 391,000 barrels, substantially less than the expected 1.35 million-barrel draw.

Gasoline inventories unexpectedly increased by 1.27 million barrels, compared with expectations for a 1.25 million-barrel decline.

Distillate inventories also rose by 2.09 million barrels, versus expectations for a 700,000-barrel draw.

US crude production increased 0.6% week-on-week to a record 13.947 million bpd.

The main supportive element was Cushing crude inventories, which fell by 684,000 barrels.

The EIA reported that as of September 4:

• US crude inventories were 0.1% above the seasonal five-year average.
• Gasoline inventories were 5.5% below the seasonal five-year average.
• Distillate inventories were 14.0% below the seasonal five-year average.

The record level of US production remains a significant bearish consideration for crude prices, although relatively tight gasoline and distillate inventories provide some support to refined products.

US Oil Rig Count Edges Higher

Baker Hughes reported Friday that the number of active US oil rigs increased by one to 450 rigs during the week ending September 11.

The total remains modestly below the 1.25-year high of 455 rigs recorded during the week of August 14.

The relatively stable US drilling activity suggests domestic producers remain capable of maintaining elevated production levels despite the recent volatility in global crude markets.

Today Markets View

The crude oil market remains fundamentally conflicted.

On one side, record US production, weak demand expectations, the EIA’s larger-than-expected product inventories and the completion of OPEC+’s planned supply restoration all argue for lower prices.

On the other, the physical supply picture is becoming increasingly vulnerable to geopolitical disruption. The closure of the Strait of Hormuz, attacks affecting Red Sea shipping, reduced Saudi exports and continuing damage to Russian energy infrastructure create substantial upside risk.

Louis Roche, Analyst at Today Markets, commented:

“The oil market is being pulled in two opposing directions. Demand fundamentals are deteriorating, but the market is increasingly pricing the risk that geopolitical disruptions could remove significant volumes of crude from global supply chains. Until there is greater clarity around Hormuz and the wider Middle East conflict, downside moves in crude are likely to remain vulnerable to sharp reversals.”

The immediate direction of crude prices will therefore depend heavily on whether supply disruption or demand destruction becomes the dominant market narrative.

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Analysis by Louis Roche, Analyst, Today Markets