The US will wake up this morning to a politically wounded President and a mightily incensed Republican leadership. No doubt, accusations will fly, but the consequences will be anything but clear. Nothing, absolutely nothing, about the second Trump presidency has been predictable. The Democrats, with 323 of the 435 House seats and 28 of the 35 Senate seats counted at the time of writing, will have won control of both chambers. The clean sweep raises more questions than answers, the most fundamental of which is whether Donald Trump will become a lame duck for the next two years or an angry duck.

More specifically, how much pressure can Congress exert on a President who will keep trying to govern through executive power? Will the US relationship with its allies and NATO change? Will the trade war subside? Will inflation cool as efforts to reach mutually acceptable truces intensify? Or will Russia feel emboldened to continue its war against Ukraine with the brazen assistance of the US? Will Israel go it alone in renewing its attacks on Iran and seek regime change once the US stops funding the Jewish state, sending oil prices to new highs? The outcome of the 2026 US midterm elections provides plenty of food for thought for analysts and forecasters. The repercussions will be discussed frequently on these pages.

Disharmony Between Inventories and Spreads

There is an understandable and more than palpable sense of growing optimism that the Persian Gulf conflict might finally be drawing to a potentially painfully slow end. Brent dropped $10/bbl over the past two days as peace talks, indirect though they may be, have not broken down. We have been here before, but claims of an imminent resolution to the crisis have always proved inaccurate and overzealous. What is different this time is that Monday’s trigger came from Iran, which, ironically, might be more credible than past announcements from its adversary, which has frequently been crying wolf over the past eight months. One also wonders about the timing of the Iranian move, which came precisely one day before the midterm elections, with no tangible impact on US retail fuel prices until after the polls had closed. Another factor might have been the intention to prevent a potential joint Israeli-US strike after the US elections. Of course, nothing is over until it is over, and it is worth noting that the Strait of Hormuz has not been reopened and that the wide chasm between the parties' respective positions could prove unbridgeable.

As belief in an eventual, and hopefully sustainable and enforceable truce gains traction, it is a useful exercise to take a deep dive into the state of global and regional stocks and compare them with assorted time spreads and crack spreads. Both are, or have been, widely regarded as accurate reflections of the underlying physical markets, whereas outright futures prices are conventionally seen as mirroring the sentiment of financial investors. Yet hardly anything has been conventional over the past few months.

Oil stockpiles are precariously depleted; there is no escaping that fact. The CEO of ADNOC estimates that global oil inventories have plunged by almost 1 billion bbls and that diesel stockpiles have declined to their lowest levels in 35 years in some regions. Energy Intelligence broadly agrees. In its usual thorough roundup, it estimates that global oil inventories declined by more than 700 million bbls between February and October, the lion’s share of which came from commercial stocks. It points out that, of the 8.98 billion bbls of global stocks, only a mere 4.48 billion bbls (equivalent to 43 days of forward demand) fall into the ‘usable’ category.

We have repeatedly commented on the low levels of US commercial and strategic inventories. Commercial stockpiles are 4% lower than a year ago and 2% below the five-year average, with the deficit in distillate inventories particularly concerning. US SPR stocks are at their lowest level in 44 years, while government-controlled OECD oil inventories in August were more than 200 million bbls, or 17%, below their year-ago level (IEA). The year-on-year deficit in Singapore stands at 18%, although current product inventories are 15% above the five-year average. In Europe's ARA triangle, combined product stocks show an annual shortfall of 30% and a deficit of 23% relative to the long-term seasonal average.

The picture that emerges is one of genuine tightness, which would normally imply strong backwardation and comparatively healthy crack spreads. As competition for available barrels intensifies, the convenience yield – the operational benefit of physically holding oil – increases. While this theory is still reflected in the market structure, it is striking how backwardation and refining margins, at least in the derivatives markets, have weakened. The premium commanded by M1 crude oil contracts over M7 has shrunk from almost $40/bbl at the beginning of April to close to $10/bbl in both WTI and Brent, even as inventories are now testing operational limits. The front-end Dated Brent CFDs, which stood at $35/bbl seven months ago, have now dwindled to a mere $5/bbl. The CME 3-2-1 crack spread, while still historically high, has fallen from $75/bbl in September to $50/bbl. There has been a significant amount of love lost between stocks and spreads.

Under the current vicious market conditions, it is challenging to take a scientific or statistical approach and use past patterns to predict future price movements. Impressions are the next best thing, and at the moment they suggest that the oil market is moving on expectations of an impending truce (or truces). If peace is indeed approaching and oil starts flowing again, depleted stocks will move back into alignment with spreads. On the other hand, should the current optimism prove misplaced, stocks will remain dangerously exhausted, and spreads will approach their annual peaks. The fundamental question is whether we are heading towards war or peace. In either case, headlines, soundbites and social media posts will remain the key drivers of prices.

Overnight Pricing