This was supposed to be the week that America dramatically escalated its war with Iran.
President Donald Trump repeatedly hinted that US and Israeli attacks on Iran would resume once the midterm elections were over. In anticipation of a military escalation, oil prices spent every single day of October above $100 a barrel, gradually rising to a four-year high of $114 on the last trading day of the month.
Then, a sudden shift: Trump just before the midterms argued that renewed attacks were no longer necessary. And, last Tuesday, Americans voted overwhelmingly for Democrats in a sweeping rebuke of Trump’s Iran policy – a signal that Congress may put up some resistance to the war.
Oil prices plunged over the past week, sinking by $25 to their lowest point in three months and briefly falling below $90 a barrel Tuesday.
Are those events related? Undoubtedly. But the simple political explanation for such a dramatic decline in oil prices fails to account for the astonishing changes happening under the oil market’s hood: Despite the biggest oil supply shock in history, the world is suddenly producing more crude than it consumes.
The oil market has returned to its fundamentals, and they’re looking surprisingly strong.
The story of the oil market throughout the Iran war has been one of remarkable creativity.
Many oil analysts anticipated doomsday scenarios of oil quickly topping $200 a barrel when Iran blocked off tanker traffic through the Strait of Hormuz pinch point. Instead, oil never came close to hitting the all-time high set in 2008 – or even the more recent peak set in 2022 at the outset of the Russia-Ukraine war.
The market’s resourcefulness – rerouting oil via pipelines and forcing crude tankers through the strait via complex shuttle and military operations – paid off. During occasional days over the past couple months, oil flows through the Middle East have surpassed pre-war averages.
Middle Eastern oil transits certainly haven’t returned to normal. The flows have been volatile, and they were averaging 70% of the pre-war average over the past week, according to oil data tracker Kpler.
But after plunging to 9.8 million barrels per day at the outset of the war in March, oil transits averaged 20.7 million barrels per day last week, according to Natasha Kaneva, head of global commodities research at JPMorgan. That’s closing in on the 24.7 million barrels the Middle East was shipping each day before the war.
(Math time: 20.7 million – 24.7 million = -4 million. Keep that in the back of your head.)
To compensate, oil majors increased output from around the world – particularly from Latin America. Crude flows from outside the Middle East grew by 1.5 million barrels per day from the same point last year.
(More math: -4 million+ 1.5 million = -2.5 million. Keep reading.)
Those increases have been gradual but steady (unlike the topsy turvy Middle East), and energy companies continue to see promise there: Exxon announced Tuesday it has taken preliminary steps that could eventually lead it to return to Venezuela after a two-decade hiatus.
But we’re still at -2.5 million barrels per day. The increase in global production and brute force through the Middle East don’t fully account for how the oil market could return to balance.
The missing element: plunging demand.
Oil consumption has fallen by 3.3 million barrels per day on average during the course of the war, according to JPMorgan, and demand has grown considerably worse over the past couple months. Consumption fell by 3.8 million barrels per day in September and October.
(Last math: -2.5 million + 3.8 million = 1.3 million barrels per day. … OK with rounding it’s actually 1.4 million, but whatever.)
So that’s how you get to an October oil surplus: Stop using as much oil.
The decline in oil demand was in part because high prices forced consumers around the world to make some painful decisions about their energy usage. But fuel prices factored in less to the oil surplus than you might think.
Yes, diesel hit a record high several weeks ago as Ukraine bombarded Russian refineries with drone strikes – until a Trump-negotiated energy ceasefire led to a multi-week respite. And gas prices are on track for a four-year high in 2026, even as they fell below $4 on Tuesday for the first time in several months.
It’s also true that gasoline demand has been in a yearslong slump; electric vehicles are growing increasingly popular – outside the United States, that is; and fuel economy is improving. Improved mileage has put annual per-capita American gas consumption on pace to fall to a post-pandemic low of 390 gallons this year, down from 440 gallons a decade ago, according to Pavel Molchanov, investment strategy analyst at Raymond James.
But both diesel and gas demand slumped primarily for a less obvious reason: refinery constraints. The world simply doesn’t have sufficient refinery infrastructure to make up for lost output from the Middle East and Russia. Global refineries have been working in overdrive.
The world could produce all the oil it wants, but it simply can’t make it into useful fuels fast enough. So, the refining shortfall has been absorbed by sinking global demand – for gas, diesel and the oil that would otherwise be refined into fuel.
The oil surplus has allowed the US to replenish some of its key inventories – particularly in Cushing, Oklahoma, the pipeline crossroads of America. Cushing stockpiles fell below operational minimums in July and are now at their highest level since May, according to the US Energy Information Administration. That gives the key storage facility some much-needed wiggle room, staving off a potential oil price crisis.
A month or two of oil surplus building could give Trump some leverage to wait Iran out.
The US-led blockade against Iran’s ports is working: Iran has exported zero oil through legitimate channels since August, and the economic embargo has sent Iran’s annual inflation rate surging above 70% over the past year – the country’s highest since World War II.
And a Democratic Congress may be able to hold Trump back a bit, but lawmakers will lack significant power to get out of the Iran war.
Still, the “blue tsunami” showed that Iran maintains leverage, too: Trump has been politically weakened, and the election showed Iran can inflict significant economic damage across the world by maintaining a military presence in the Strait of Hormuz.
“This is not a recipe for a quick, acceptable end to the conflict,” said Dan Pickering, founder and chief investment officer at Pickering Energy Partners. “This is a recipe for more of the same.”
