Geopolitical conflicts have pushed oil prices higher, yet elevated prices are quickly curbing demand, and when combined with unexpected inventory builds, supply and demand are rebalancing at higher price levels. This dynamic vividly demonstrates how prices achieve self-correction by suppressing demand, and it also explains why the recent closure of the Strait of Hormuz has not driven oil prices back to their previous highs despite the geopolitical premium.
According to OPEC data, July production rebounded to 23.632 million barrels per day, up 1.695 million barrels per day month-over-month, with primary contributions from Iraq, Kuwait, and Saudi Arabia. Meanwhile, the UAE, having exited the organization, saw its production return to near five-year highs, with July output up 19.17% year-over-year. However, this recovery is not due to the Strait of Hormuz returning to normal operations, but rather because producers have maintained exports through alternative routes and riskier transport methods under restricted shipping lanes.
Iraq's adjustments operate on two fronts: overland and pipeline. Overland, large volumes of fuel oil are trucked through Syria to Mediterranean ports, with some crude also shipped via a Jordanian route. On the pipeline front, an agreement with Turkey allocates a daily quota of 750,000 barrels, utilizing the 1.5 million barrel-per-day capacity Turkey-Iraq pipeline to provide a stable export channel that bypasses the Strait. The UAE has maintained export stability through multiple transport paths: the Habshan-to-Fujairah pipeline delivers Abu Dhabi crude directly to the Gulf of Oman, running at full capacity during the crisis to form baseline capacity; for volumes not covered by pipelines, shuttle tankers with disabled positioning signals cross the Strait and then transfer cargo to larger vessels in open waters, keeping ocean-going tankers out of conflict zones. This combination has pushed UAE exports beyond pre-war levels.
U.S. crude production in 2026 continues to hit new highs, with output at 13.805 million barrels per day for the week ending August 7, up 0.001 million barrels per day week-over-week and up 3.59% year-over-year. U.S. active rig counts declined for three consecutive years from 2023 to 2025, but have been gradually recovering from the bottom since mid-May. For the week ending August 14, active oil rigs reached 455, the highest level since September 2025. High prices are awakening the shale industry's expansion impulse long suppressed by capital discipline. Theoretically, the price-to-production transmission takes 6-8 months, suggesting that the higher prices seen in the first half of the year will drive U.S. shale output higher in the second half. The EIA's August report upgraded its 2026 and even 2027 U.S. crude production forecasts, projecting 13.8 million barrels per day in 2026, up 0.21 million barrels per day year-over-year, a notable upward revision from the 13.59 million barrels per day projected in the January report. With high prices and internal OPEC+ tensions, accelerated U.S. production growth may secure greater influence in oil pricing.
U.S. refined product consumption is weak, with significant divergence across products. Early-year cold snaps boosted heating demand in Europe and the U.S., pushing total oil product consumption above the past two years, driven mainly by distillates. However, when gasoline was expected to take over and support demand in the summer, it was severely constrained by high prices. According to EIA data for the week ending August 7, U.S. four-week average total product demand was 20.72 million barrels per day, 2.07% lower than the same period last year; four-week average gasoline demand was 8.996 million barrels per day, down 0.94% year-over-year; and four-week average distillate demand was 3.66 million barrels per day, up 1.89% year-over-year. The market typically defines 9 million barrels per day of U.S. gasoline demand as the threshold for a healthy market, yet throughout the summer driving season, gasoline demand remained below this benchmark.
China's crude imports, processing volumes, and refinery utilization rates are all declining in tandem. The core driver is the disruption of the Strait of Hormuz following the U.S.-Iran conflict, which has sharply reduced Middle Eastern crude supply and driven international prices higher. Facing prohibitive import costs, China has significantly cut crude imports, with June imports plunging to 29.27 million tons, a five-year low. Local refineries, represented by Shandong independent refiners, have seen profits turn negative across the board since late April, trapped in a cycle of losses when operating. Companies have been forced to reduce output through load cuts and maintenance, with Shandong independent refinery atmospheric and vacuum unit utilization rates declining steadily since the U.S.-Iran conflict to 53.65% as of August 12. Additionally, the proliferation of new energy vehicles is fundamentally reshaping China's oil consumption structure. With multiple alternative energy options available, high prices have a more pronounced suppressive effect on oil consumption, with weakening end-user demand transmitting downstream and jointly compressing upstream processing and import volumes.
According to the latest monthly reports from international agencies, the three major international institutions maintain a pessimistic outlook for 2026 global oil demand growth. The EIA kept its forecast unchanged from the previous month, and while OPEC maintains its view of positive global demand growth in 2026, both OPEC and the IEA continue to downgrade global demand growth expectations. In August 2026, the EIA, IEA, and OPEC project 2026 global oil demand growth of -1.20 million barrels per day, -1.56 million barrels per day, and +0.58 million barrels per day, respectively. The IEA notes that the ongoing closure of the Strait of Hormuz has disrupted international supply chains and constrained product availability, while persistently high prices continue to suppress consumption as the primary reasons for the downward demand revision. However, both the IEA and EIA expect Chinese demand to be suppressed by high prices in 2026, with a return to moderate growth expected in 2027.
According to the EIA's August report, due to the Strait of Hormuz blockade, the 2026 full-year supply deficit has been significantly upgraded from the July 2026 report, with the previously expected Q4 easing once again revised to a deficit. Global oil supply in 2026 is projected at 100.82 million barrels per day, with demand at 102.73 million barrels per day, widening the full-year supply-demand gap to 1.91 million barrels per day, an increase of 1.02 million barrels per day from last month's forecast. Looking ahead, the short-term geopolitical environment has entered a phase of fluctuating news, with the market awaiting further direction from U.S.-Iran negotiations, suggesting a wait-and-see approach for now. In the medium term, as the September rate decision approaches and the off-season arrives, oil prices may trend weaker once the Strait reopens. Over the long term, as Gulf production capacity recovers and competitive output increases drive prices, the center of gravity for oil prices is expected to shift downward again.
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