CICC has released a research report stating that the recent escalation in US-Iran tensions has caused the Strait of Hormuz to stall again after a period of resumed navigation, triggering a strong rebound in Brent crude prices from their lows, which are now approaching $90 per barrel.
The firm believes two key changes may have occurred in the market. First, global oil inventories have been drawn down for several months, significantly reducing their buffer capacity. Coupled with the nearing end of strategic petroleum reserve (SPR) releases by OECD nations, the pressure of destocking may increasingly shift to commercial inventories, potentially increasing the short-term elasticity of crude oil risk premiums.
Second, the pressure of demand destruction under supply shocks has already materialized more strongly than expected in the second quarter. Weak demand expectations may limit the duration of oil prices staying at elevated levels.
The report's main viewpoints are outlined below. The recent intensification of US-Iran tensions has led to another halt in traffic through the Strait of Hormuz following a temporary resumption, with Brent crude prices rebounding strongly from their lows to near $90 per barrel.
CICC suggests the oil market may be repricing the risk of trade disruption. With the situation escalating further over the weekend, if the strait remains blocked, the market may need to reassess extreme inventory risks.
Compared to the initial closure in late February at the onset of the US-Iran conflict, CICC identifies two potential core shifts in the current market landscape.
Firstly, the global oil inventory buffer has diminished after months of drawdowns. With OECD countries' SPR releases nearing completion, destocking pressures may increasingly fall on commercial stocks, potentially amplifying the short-term responsiveness of crude risk premiums.
Secondly, demand destruction pressures from supply shocks have already exceeded expectations in Q2, with weak demand forecasts likely capping how long prices can remain high.
Regarding price forecasts, the firm highlights increased risks of a short-term oil price surge and maintains its projection for a Q3 2026 Brent crude price center of $90 per barrel.
On the supply side, crude production in the Gulf region remains in the early stages of recovery, with refined products and LNG supply recovering more slowly. Trade disruptions could further delay the return of Middle Eastern oil and gas, and stockpiling pressure within the Gulf after the strait's re-closure may be lower than before.
Additionally, the Russia-Ukraine situation has seen renewed volatility. Following damage to its refineries, Russia has further intensified export bans on refined products. CICC warns this could exacerbate mismatches in diesel and other refined product markets across Europe and Asia.
Weakened Inventory Buffer May Amplify Short-Term Oil Price Volatility Amid Trade Disruptions
Looking back, the Strait of Hormuz was closed for months following the US-Iran conflict before traffic partially resumed in June. From the late May preliminary ceasefire draft framework to the formal signing of a ceasefire memorandum of understanding on June 17th, the months-long conflict de-escalated. Subsequently, the US lifted its maritime blockade on Iran, and Iran resumed navigation through the strait. The rapid recovery in trade flows initially led to a significant easing of regional geopolitical tensions.
According to the IEA, Gulf region oil exports in June increased by approximately 6.5 million barrels per day month-on-month, rising to 16.1 million bpd, recovering to about 65% of normal levels. Crude oil exports rose by around 5.5 million bpd month-on-month. Combined with previous pipeline transfers from Saudi Arabia and the UAE, total Gulf crude exports reached 13.2 million bpd, recovering to 70% of normal levels. Refined product exports increased by about 1 million bpd month-on-month to 2.9 million bpd, nearing 50% of normal levels.
Following Iran's attack on a merchant ship in early July and the full-scale escalation of US-Iran military clashes over the past two weeks, Strait of Hormuz transport may have stalled again. The latest shipping data indicates that, even considering "dark fleet" activity, weekly tanker traffic through the strait may have fallen below 10% of normal levels.
Compared to the first closure in late February, CICC believes the most significant change in the oil market may be the reduced buffer capacity of global oil inventories.
On one hand, onshore oil inventories have been drawn down for months and are now at historically low levels. By the end of Q2, the deviation of OECD oil inventories from the five-year average had widened significantly from -1% at the end of February to -8%, aligning with the firm's medium-term outlook expectations. During this period, OECD oil inventories were drawn down by nearly 300 million barrels, with a joint SPR release of 200 million barrels alleviating much of the pressure on commercial stocks.
Regionally, US oil inventories were drawn down by 160 million barrels, bearing over half of the global destocking burden, but inventory concerns are beginning to surface. Since June, as crude inventories at the Cushing hub fell to historic lows, the WTI spot discount has largely disappeared, suggesting limited further inventory drawdown potential.
On the other hand, the buffer of oil in transit from the Middle East has decreased. Before the first closure, oil already en route from prior normal shipments provided about a one-month buffer for onshore inventories, with the full challenge of onshore destocking arriving in April. However, before this latest closure, Gulf oil exports in June were 8-9 million bpd lower than February levels, meaning pressure from reduced arrivals may materialize more quickly.
With the strait closed again in the short term, CICC notes that lower inventory buffers could provide greater elasticity for crude oil premiums. Looking ahead, OECD SPR release plans are likely to taper off by Q3 2026. If strait transit remains obstructed, the firm warns that global onshore oil destocking pressure may further shift towards commercial inventories and the Europe-Asia region.
Demand Destruction Has Arrived; Negative Feedback Pressure May Limit Duration of High Oil Prices
Compared to the initial conflict phase where the market focused on supply shocks and overlooked demand elasticity, the extent of global oil demand destruction in Q2 has exceeded market expectations, and its impact on the supply-demand balance may now be difficult to ignore.
According to the IEA, global oil demand in Q2 2026 decreased by nearly 4 million bpd year-on-year. Since April, oil consumption in major regions outside the US has entered a year-on-year contraction.
Regionally, OECD Europe's oil demand fell by approximately 5.6% year-on-year in Q2 2026. Year-on-year declines in Japan, South Korea, and China's oil demand ranged between 10-20%. US oil demand recorded about 2.7% year-on-year growth in Q2 2026 but has shown signs of weakness since July, preliminarily entering a year-on-year contraction.
CICC suggests that a short-term oil price spike could further deepen negative demand feedback, and relatively weak demand expectations may limit how long prices stay elevated. Following the recent re-closure of the strait, crude oil spot premiums have remained subdued, which may preliminarily reflect weak demand.
Based on the above analysis, CICC highlights increased risks of a short-term oil price surge and maintains its projection for a Q3 2026 Brent crude price center of $90 per barrel.
Middle East Crude Production Recovery Delayed; Russia-Ukraine Situation Increases Diesel Market Mismatch Risk
On the supply side, the recent geopolitical escalation may delay the recovery of Middle Eastern oil and gas production. With the resumption of trade, the combined crude output of the six Gulf Cooperation Council (GCC) countries increased by approximately 3.13 million bpd month-on-month in June. The recovery pace in the UAE and Kuwait exceeded CICC's expectations, with production increasing by 870,000 bpd each; UAE crude production has returned to pre-conflict levels.
Recovery in Saudi Arabia, Iraq, and Qatar was relatively steady, with production increasing by 550,000, 220,000, and 110,000 bpd month-on-month, respectively. Iran's crude production rose by about 510,000 bpd month-on-month. The proportion of total Gulf crude production impacted fell from 45% in May to 32%.
Overall, the response speed of Gulf crude production in June was faster than CICC anticipated. Coupled with significant cuts to Official Selling Prices (OSP) for July-August by Saudi Arabia, Kuwait, and Iraq, this may reflect strong producer desire to quickly regain market share.
The short-term geopolitical re-escalation may further delay the return of Gulf oil and gas supply. The recent return of Murban crude spot premiums may also preliminarily indicate renewed trade disruptions. Compared to the first strait closure, current stockpiling pressure within the Gulf may be lower.
Structurally, the recovery of Middle East crude trade was initially much faster than that of refined products and LNG. CICC's monitored flows from Qatar's LNG liquefaction facilities remain sluggish, suggesting that previously heavily damaged refinery capacity and liquefaction units may require longer repair times. Recent refined product and Europe-Asia LNG prices have also shown greater elasticity.
The Russia-Ukraine situation has also seen renewed volatility. Damage to Russian refineries may intensify mismatch pressures in the refined products market. In 2025, Russia exported about 2.6 million bpd of refined products, accounting for roughly 10% of global refined product trade, primarily diesel and fuel oil, with a lower proportion of gasoline.
Since Q2, the Russia-Ukraine conflict has severely damaged Russian refinery capacity. In June, Russian crude processing fell to 3.8 million bpd and refined product exports dropped to 1.9 million bpd, both representing year-on-year declines of about 30%. According to IEA statistics, approximately 4.82 million bpd of Russian refinery capacity is currently affected by the conflict, representing over 70% of its total, suggesting potential for further tightening of regional refined product supply.
Following Russia's phased implementation of export bans on gasoline, jet fuel, and diesel, CICC believes it may subsequently need to turn to importing some refined products to meet domestic consumption. This could further deepen supply-demand mismatches in global markets for middle and heavy sour refined products like diesel and fuel oil, posing greater upside risks to refined product prices and crack spreads in the Europe-Asia region.
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