Oil markets ended the week sharply higher, with Brent approaching $110 per barrel for the first time since May, as renewed attacks on Saudi Arabia raised concerns about the security of alternative export routes. On Friday, Saudi-led forces intercepted a ballistic missile heading towards Yanbu, a key Red Sea port which has become increasingly important for bypassing the Strait of Hormuz. No damage was reported, but the incident came amid intensified attacks on commercial shipping and growing fears of a wider regional escalation.
The rally came despite weakening global oil demand forecasts and renewed efforts to release emergency reserves. Meanwhile, higher energy prices are increasingly feeding into inflation, complicating monetary policy and placing further pressure on the global economy.
Benchmark snapshot
- Brent: $109.86/bbl (+4.9% WoW)
- WTI: $101.41/bbl (+10.4% WoW)
- Dubai: $109.44/bbl (+0.4% WoW)
- Oman: $105.76/bbl (−2.4% WoW)
Brent rose 3.7% on Friday alone, despite expectations that additional supply and emergency stock releases would help contain prices. The rise is particularly notable given the recovery in Gulf production during September. According to the IEA's October Oil Market Report, Gulf crude exports increased by 4.4 million barrels per day to 13.9 million, reaching more than 75% of pre-war levels. Alternative routes, including Saudi Arabia's East-West Pipeline, have helped compensate for reduced traffic through Hormuz.
However, that recovery has become increasingly vulnerable. As discussed in last week's OilSight, shipping through Hormuz had already fallen sharply, with producers relying more heavily on alternative terminals and pipelines. This week, renewed attacks around the Strait and the attempted strike on Yanbu raised concerns about the infrastructure supporting those alternative flows. The issue is no longer simply whether producers can restore output, but whether they can reliably transport it to customers. Meanwhile, supertanker freight rates remain exceptionally elevated, despite easing from last week's record levels, adding further costs to international crude shipments.
The demand outlook has also deteriorated. The IEA now expects global oil consumption to contract by 2.6 million barrels per day in 2026 as high prices and weaker economic conditions reduce consumption. OPEC remains considerably more optimistic, forecasting modest demand growth of 180,000 barrels per day this year before a recovery of 2.55 million in 2027, partly reflecting the need to rebuild depleted inventories. The difference illustrates how uncertain the pace of any recovery remains.
China adds another complication. September crude imports fell 21.5% compared with a year earlier, to approximately 9 million barrels per day. However, delayed deliveries and higher refinery runs also contributed to a substantial drawdown in domestic crude inventories. This suggests that the decline in imports should not necessarily be interpreted as an equivalent fall in underlying demand. China's ability to restore shipments and rebuild stocks will nevertheless be important for global oil balances next year.
The situation is more difficult for refined products, particularly diesel. Middle Eastern refined fuel exports recovered to just 1.9 million barrels per day in September, compared with 4.7 million before the conflict. The IEA expects diesel markets to remain tight well into 2027, with global diesel exports in September approximately 700,000 barrels per day below their levels a year earlier.
On Thursday, the IEA agreed to accelerate the release of approximately 100 million barrels of remaining emergency stocks, including more than 20 million barrels of diesel. Around 330 million barrels have already been released under the programme announced in March. While these measures should provide some temporary relief, accelerating existing commitments does not replace lost refining capacity or resolve the logistical constraints preventing fuel from reaching consumers.
The wider economic consequences are becoming increasingly apparent. US consumer inflation accelerated to 3.7% in September, with gasoline prices increasing 9.1% over the month and accounting for more than half of the monthly rise in prices. The following day, producer inflation came in at 6.3% annually, with prices rising 1.3% during September alone, their largest monthly increase since March 2022. Diesel producer prices rose 21% over the month, highlighting how elevated fuel costs are increasingly affecting transportation and industrial activity.
These figures place the Federal Reserve in a difficult position. Higher inflation strengthens the case for restrictive monetary policy, but further interest rate increases risk weakening demand. The IMF's October outlook projects global growth of 3.1% in 2026 and inflation of 4.7%, with energy-importing economies facing particularly difficult conditions. This creates a further challenge for oil markets, as high prices are contributing to the economic slowdown that may eventually weaken demand.
The political consequences are also becoming more visible. Following last week's announcement of a diesel agreement between Washington and Moscow, President Trump waived much of a new package of Russia-related sanctions and tariffs on Friday night. The decision comes as Washington faces growing pressure to reduce fuel prices ahead of November's midterm elections, despite criticism that easing restrictions could strengthen Russia's finances.
However, Ukraine resumed strikes on Russian refining infrastructure this week, targeting the Ryazan refinery and raising further questions about Moscow's ability to deliver additional diesel. This illustrates the limitations of Washington's approach. Relaxing sanctions may allow more Russian fuel to enter international markets, but it cannot compensate for refining capacity that is unavailable. The latest sanctions waiver also came after Friday's oil settlements, meaning its immediate market impact has yet to be reflected in the benchmark prices.
What matters next
Saudi export infrastructure - Friday's attempted strike on Yanbu raises questions about the security of alternative routes around Hormuz. Any confirmed damage or sustained interruption would be considerably more significant than the threat alone.
Inflation and monetary policy - Higher US consumer and producer prices have increased expectations of further Federal Reserve tightening. The next policy decision will be important for assessing how central banks balance inflation against weakening economic activity.
Diesel and emergency reserves - The timing of the IEA's accelerated releases will matter as winter approaches. The central question is whether additional supplies can slow inventory declines before seasonal demand increases.
Russia and China - Washington's sanctions relief, renewed attacks on Russian refineries and China's inventory rebuilding could all influence the availability of crude and refined fuels over the coming weeks.
In last week's edition, I argued that oil markets were increasingly constrained by access to particular fuels and crude grades, rather than simply the availability of crude. This week's developments reinforce that distinction. Gulf production has recovered considerably, yet diesel shortages persist and the alternative shipping routes supporting that recovery are increasingly exposed to disruption.
There is also a growing contradiction between the physical market and the wider economy. High energy prices are contributing to inflation and weakening demand, but the resulting slowdown does not immediately resolve shortages caused by damaged refineries, disrupted shipping and depleted inventories. Governments are increasingly relying on emergency reserves and politically difficult arrangements to contain prices, but these measures offer only temporary relief.
For now, Brent's return towards $110 reflects a market concerned that further escalation could undermine an already fragile supply recovery. Yet with demand forecasts weakening and the economic consequences of high energy prices becoming more visible, the sustainability of the rally remains uncertain. The coming months may depend less on how much oil producers can pump and more on whether the global economy can absorb the cost of delivering it.