Oil Prices Pull Back: Demand Factors and Geopolitics

Despite what has been largest supply disruption on record, Brent crude has remained stubbornly below US$100 per barrel in recent weeks, held down by various factors that have fundamentally altered the market’s response to geopolitical shocks.

Brent crude futures have traded in a volatile US$85-98 range over the past month, repeatedly failing to sustain moves above the psychologically significant US$100 threshold despite Persian Gulf disruptions that have effectively taken offline what would normally be considered catastrophic volumes. The front-month contract has experienced multiple 8-10% intraday swings, particularly around political headlines suggesting potential de-escalation, while volatility indices for crude options have reached levels not seen since the early pandemic period of 2020.

West Texas Intermediate has tracked Brent’s movements closely, with the spread between the two benchmarks fluctuating between US$3-6 per barrel as American production continues to hit record levels. Energy stocks have similarly whipsawed, with integrated majors and refiners posting gains on inventory profits while pure-play exploration and production companies have struggled to capitalize on what should theoretically be a bullish supply environment.

What has Slowed The Rate of Oil Price Gains?

The paradox at the heart of today’s oil market lies in the collision of multiple unprecedented factors that have made oil trading all the more difficult.

While roughly 10-14 million barrels per day of Persian Gulf capacity has been effectively disrupted through the weaponization of the Strait of Hormuz, actual supply losses have been substantially mitigated. Approximately 7 million barrels per day continues to flow from the region through two critical channels: bypass pipelines through Saudi Arabia and the United Arab Emirates moving roughly 5 million barrels per day, and an additional 2 million barrels per day transported by tankers operating with beacons disabled, employing ship-to-ship transfers and other tactics reminiscent of sanctioned “dark fleet” operations.

China has emerged as the single most important swing factor in the global balance.

Seaborne crude imports to the world’s largest oil consumer collapsed to approximately 6.7 million barrels per day in May, down nearly 40% from the 2025 average of around 10.5–11 million barrels per day. This 4 million barrel per day reduction, equivalent to the combined crude consumption of Germany and France, appears to reflect deliberate drawdowns of strategic and commercial reserves accumulated during earlier periods when China was adding close to 1 million barrels per day to storage.

Beijing’s ability to tap these inventories has effectively removed massive demand from the seaborne market precisely when it would otherwise be competing most aggressively for scarce barrels.

Demand destruction has reached extraordinary levels, with analysts estimating 3–4 million barrels per day of consumption has been eliminated relative to pre-shock trajectories. The petrochemicals sector has borne the brunt of the adjustment as margins compress and feedstock costs spike, forcing production cuts and facility closures. More strikingly, evidence has emerged of fuel switching on a scale not seen in decades, particularly across Asia.

Consumers and businesses in price-sensitive markets have reverted to coal for power generation and industrial heating, while reports from India indicate intermittent shortages in subsidized cooking fuel distribution, with some households returning to traditional biomass and firewood as kerosene and liquefied petroleum gas become unaffordable.

The International Energy Agency’s coordinated release of approximately 400 million barrels from member country emergency stocks has been flowing to market at roughly 2.5 million barrels per day. The United States Strategic Petroleum Reserve has been drawn down to levels not seen in four decades, currently sitting in the low-to-mid 300 million barrel range. At current release rates of approximately 10 million barrels per week, the SPR could fall below 250 million barrels by mid-August, a threshold many energy security analysts describe as critically low.

Crucially, the market entered this crisis already oversupplied by an estimated 3–4 million barrels per day, the legacy of resurgent US shale production and earlier OPEC+ production increases that had not been fully absorbed by demand growth.

Production across the Americas has continued to climb, with Brazil’s output up approximately 20% year-over-year to record levels as pre-salt projects ramp up, while Guyana’s multi-phase offshore development continues its dramatic growth trajectory. Even the United States and China have recently touched production records, adding to the global surplus that has provided a crucial cushion against the supply shock.

Will Oil prices move back above $100?

The current pullback comes with talks between the US and Iran once again said to be nearing an agreement. The surprise perhaps was more the lid being held on oil prices despite what had appeared to be accelerating tensions, and new strikes in the region over the past week. The combination of record emergency stock releases, Chinese inventory drawdowns, and demand destruction has successfully kept Brent below US$100, but each of these factors has natural limits.

The US SPR cannot be drawn much lower without compromising energy security and hurricane-season response capability. China’s accumulated inventories, while substantial, are finite and will eventually require replenishment. Even demand destruction has boundaries, particularly in essential uses like transportation fuels and agricultural inputs.

The forward curve reflects this tension, with modest backwardation in nearby months but growing uncertainty about the sustainability of current supply-demand balances beyond the third quarter of 2026. Markets are effectively pricing a binary outcome: either geopolitical tensions ease and bypass flows normalize, allowing prices to drift lower as the pre-crisis oversupply reasserts itself, or the situation persists or worsens, forcing a sharp repricing higher once inventory buffers are exhausted.