Oil Prices Ignore the Warning Signs in Physical Markets
By Irina Slav - Jul 28, 2026, 6:00 PM CDT
Oil markets remain surprisingly optimistic despite major supply disruptions. That optimism is increasingly being tested, as record refining margins, tightening fuel supplies, and declining global inventories point to growing stress in physical oil markets rather than futures. The current pause in hostilities does not resolve underlying supply constraints, and physical fundamentals deserve more attention than short-term price movements.
Oil price movements since the start of March this year have become the topic of dozens of discussions. Many have been puzzled by futures prices and why they haven’t gone through the roof given the severe disruption in Middle Eastern supply. It appears the reason is sheer optimism and a bet on market adaptability. However, there is a problem with that. Adaptability has limits.
Many commentators like to compare the current oil price—and supply—situation to 2022, when Russia’s incursion into eastern Ukraine prompted an actual surge in oil prices, with Brent going almost all the way to $140 per barrel. At the time, the biggest fear on oil markets was that Western sanctions would cripple crude and fuel flows from the world’s second-largest exporter. Yet nature, or rather oil, found a way and Russian oil, gasoline, and diesel continued flowing abroad.
This is the basis for the current optimism for Middle Eastern oil and for a while, it was a reasonable enough basis for optimism, even though the Middle Eastern oil disruption was far greater than the Russian one—and a lot more literal. Iran closed the Strait of Hormuz, oil infrastructure became a target for drone and missile strikes, and Gulf states had to shut wells down for lack of storage capacity. Yet they adapted.
Saudi Arabia has managed to redirect oil flows from the East to the West and use the Red Sea port of Yanbu to ship the crude abroad. The UAE redirected flows as well, and Iraq is considering doing the same thing whenever it builds the capacity. The market, in other words, adapted. This kept a cap on futures prices along with a general hope for a peace deal despite precious little evidence that there is a real desire for peace on either of the warring sides. This hope has persisted in the face of broken ceasefire deals, inflammatory rhetoric, and a string of mutual threats and failed negotiations.
The hope that adaptability will prevail over physical oil supply disruptions appears to be just as strong, again, despite mounting evidence that caution may be advisable. Reuters’ Clyde Russell summed up the sentiment in a column this week, writing that “In effect, it may be the case that the market is betting that crude and refined product traders will be able to mitigate the worst of the Iran crisis.”
Unfortunately for those doing that betting, warning signs are flashing, especially in oil products. Crack spreads are at all-time highs, reflecting an increasingly tighter market, with some analysts suggesting this may only be the beginning. In fact, some analysts have been warning since the spring that if the war extended beyond June, all bets would be off, with global crude inventories depleted and shortages emerging in fuels.
This is exactly what is happening, albeit perhaps more slowly than many would imagine given the dramatic nature of developments. Global oil inventories are not yet empty, but they are being drawn down considerably, with the U.S. SPR nearing a critical level. Gasoline, diesel, and jet fuel supply is tightening because demand is outpacing supply, suggesting that the disruption in Middle Eastern energy exports has indeed been severe enough to warrant a closer look than just futures markets.
Yet, optimism persists. Brent and WTI are down below $90 per barrel because the U.S. and Iran are not bombing each other across Hormuz at the moment. There is no solid evidence of efforts to reach peace, only this pause in hostilities. It is time for more attention to be paid to physical markets than to futures oil price charts.
By Irina Slav for Oilprice.com
