Despite data showing an apparent surplus in refined supply over demand, the International Energy Agency (IEA) cautions that the oil market is far tighter than headline figures suggest. A confluence of robust seasonal demand, heightened refinery utilization, shifting trade flows and geopolitical disruptions have drained inventories and pushed pricing signals toward acute physical tightness. As major producers race to restore and expand output, traders and policymakers face a landscape where stock builds belie genuine market stress.

Rising Refinery Throughput Masks Stock Draws

Refinery runs in OECD nations have spiked sharply to satisfy summer travel peak and surging power‑generation needs, disguising the true state of crude availability. Between May and August, processing rates climbed by almost 4 million barrels per day (bpd), the fastest seasonal ramp in half a decade. This has propelled global refinery utilization to more than 85% of capacity—levels typically associated with early‑cycle tightness rather than surplus periods.

Yet, behind the scenes, crude stocks have seen net draws in key storage hubs. Cushing, Oklahoma inventories fell for eight consecutive weeks, and U.S. Strategic Petroleum Reserve withdrawals accelerated in June. In Europe, Amsterdam‑Rotterdam‑Antwerp (ARA) tank levels remain near five‑year lows even as headline reports cite aggregate builds. The discrepancy stems from refineries consuming more barrels to meet strong gasoline and middle‑distillate requirements, effectively turning temporary surpluses on paper into physical deficits at the terminal level.

Backwardation and Healthy Margins Signal Demand Resilience

Pricing structures further underscore a market straining to secure supply. Brent oil forward curves have moved into steep backwardation—where near‑term contracts trade at a premium to later ones—indicating traders’ preference for immediate barrels. Such backwardation has not been observed this prominently since pre‑pandemic demand recoveries, and it directly incentivizes withdrawals from storage.

Simultaneously, refinery margins for gasoline and diesel have rebounded above seasonal norms, reflecting tight product availability. In emerging markets, Asia‑Pacific refining spreads reached multiyear highs in June as processing bottlenecks and delayed turnaround schedules curtailed regional yields. Even after accounting for implied stock builds in weekly flows, healthy margins point to genuine supply pressures: processors are willing to pay up for crude to maintain output of high‑value products amid a market that cannot absorb incremental supply easily.

Geopolitical and Seasonal Disruptions Compound Tightness

Beyond regular seasonal upticks, a series of unplanned events has intensified supply shortages. The U.S. Gulf Coast saw unplanned refinery outages in Texas and Louisiana totaling over 500,000 bpd of capacity, as refineries extended maintenance cycles to capitalize on strong crack spreads. In the Middle East, attacks on commercial shipping in the Red Sea forced operators to reroute VLCCs around the Cape of Good Hope—adding weeks to round‑trip voyage times and tightening cargo availability.

Meanwhile, Venezuela’s exports remain hamstrung by sanctions and deteriorating infrastructure, removing an estimated 200,000 bpd from markets that would otherwise help plug gaps. Even as OPEC+ agreed to accelerate the unwinding of production cuts, the additional 500,000 bpd in June did little to arrest stock draws, as higher throughput at refineries absorbed much of the crude inflow. In sub‑Saharan Africa and parts of Asia, monsoon rains disrupted inland transport, delaying crude deliveries to refineries and amplifying localized supply shortages.

Petrochemicals and Power Generation Keep Crude Off the Market

A less‑visible but equally potent driver of tightness is the growing use of crude‑derived feedstocks in petrochemical plants. As ethylene and propylene margins have surged—driven by increased demand for plastics in packaging and construction—petrochemical complexes in the U.S. Gulf and Middle East ramped up naphtha cracking and fuel‑oil co‑processing. This redirected volumes away from the fuel pool, siphoning an estimated 0.4 million bpd of crude that would otherwise have been available for power generation or export.

Simultaneously, a heatwave in Southern Europe and parts of Southeast Asia boosted the burning of fuel oil in thermal power stations to meet air‑conditioning demand. Countries like India reported record electricity consumption in June, leading grid operators to fire up oil‑fired plants at double the normal seasonal rate. That extra 0.8 million bpd of fuel‑oil draw compounded the effects of peak travel demand and refining throughput, leaving fewer barrels for global floating storage or import buffers.

Trade‑policy headwinds have added further complexity. Recent U.S. tariffs on imported steel and aluminum have prompted some refiners and storage operators to divert crude cargoes to alternative markets, upending traditional trade lanes. In retaliation, certain export duties in Asia have shifted flows away from nominal surplus regions to tighter ones, exacerbating regional imbalances.

To manage risk, trading houses and national oil companies have been forced into more aggressive inventory hedging—booking forward cargoes and maintaining buffer stocks at leased tank farms in Singapore and Houston. Such strategies artificially inflate reported stock levels while actually withdrawing physical crude from prompt availability. The upshot is an illusion of comfort in metrics, while the prompt market lurches from one tightness scare to the next.

Implications for Energy Security and Policy

The IEA’s warning arrives as governments mull policy responses to potential shortages. Emergency reserve releases by some countries have provided temporary respite, but repeated use risks depleting strategic stocks ahead of winter. Subsidized fuel programs in developing economies face funding strains as import bills swell, threatening social stability.

Policymakers are now weighing options ranging from coordinated stock‑release mechanisms to incentivizing non‑OPEC production via targeted subsidies. Yet such measures carry risks: too little intervention may unleash price spikes, while over‑releasing reserves undermines the buffer needed for true crisis events. For energy‑hungry nations, the IEA’s call to look beyond headline balances is a stark reminder that apparent gluts can mask critical vulnerabilities—underscoring the need for nuanced data, diversified supply chains and responsive policy frameworks.

As markets navigate this intricate web of refinery dynamics, backwardation signals and geopolitical jitters, the overarching lesson is clear: the nominal surplus painted by supply‑demand tables fails to capture the fluid, localized and often brutal realities of physical oil availability. In the months ahead, the IEA insists, stakeholders must prioritize real‑time indicators and cooperative strategies to avert the next bout of energy stress—lest the world find itself scrambling for barrels that only exist on balance‑sheet forecasts.

(Adapted from Reuters.com)