The Persian Gulf is akin to a prison—or, better yet, a psychiatric ward. There is no escaping from it. While Iran is carefully reviewing the latest US proposal aimed at restoring traffic through the Strait and halting hostilities, the situation has become even more complex. The bad blood between the US and Iran is well documented, but tensions are now also flaring between Washington and Israeli leaders, the latter being at least indirectly responsible for nudging their steadfast ally into igniting the conflict nearly 100 days ago. After reportedly receiving an earful from President Trump, Benjamin Netanyahu appears to have stepped back from launching an all-out attack on Hezbollah and opted instead to strike Lebanon. The Iranian precondition for even considering any agreement is a truce between Israel and Hezbollah, but the US and Israeli objectives, ending the conflict versus obliterating Iran’s regional proxies, remain so far apart that a ceasefire, an armistice, and the reopening of the Strait continue to be elusive. Oil, meanwhile, continues its journey north, aided by renewed hostilities in the Middle East and in Eastern Europe, and by a substantial draw in US crude oil inventories as reported by the API post-settlement.

All the while, the conflict's ongoing impact is having significant consequences not only for the oil balance but also for consumer prices. Following last week's increase in the US PCE Index, both headline and core inflation in the Eurozone also rose in May, and an ECB rate hike this month now appears at least as plausible as Donald Trump headlining the Great American State Fair during the celebrations marking the 250th anniversary of the Declaration of Independence. Yet equities kept climbing. Nonetheless, it is difficult to envisage anything other than the technology sector remaining the bulwark of the current stock market rally; if that support were withdrawn, the market's resilience would be severely tested.

(The headline was borrowed from a GZERO Newsletter.)

The Clock’s Ticking

Markets move at the whim of the US President, the Israeli military, and the Iranian regime. It is impossible to foresee when an agreement, if ever, will be reached. What is nonetheless becoming worryingly obvious is that the longer it takes to reassure markets about the reliable availability of oil from the region, the more global oil inventories are depleted and approach critical operational levels, something that is currently neither acknowledged nor reflected in the price of oil. One cannot help but become increasingly convinced that this point of no return is dangerously close, a view corroborated by the IEA yesterday, warning of potentially and historically low inventories. It is a fair and reasonably low-risk assumption that both global oil demand growth and Persian Gulf oil supply will be revised downward for the second and third quarters when updated monthly oil-balance estimates are released over the next two weeks. The downward revision to supply is likely to exceed that of demand, simply because traffic through the Strait remained materially constrained throughout May.

The longer this new status quo persists, the less oil remains available in commercial and strategic inventories, whether afloat or on land. Competition for available barrels will intensify, and the primary beneficiaries of this unwanted contest will be refined products. Refining margins, notwithstanding the recent correction, are likely to rise again. That much has already been flagged by the investment bank Goldman Sachs. Its research team believes that refining margins could remain twice or thrice as dear for the remainder of 2026 as the average recorded between 2013 and 2019.

Goldman Sachs is particularly bullish on diesel margins. However, the premium that distillates, or diesel, command over crude oil may ultimately be overshadowed by that of gasoline, particularly in the United States during the summer months. To begin with, US gasoline inventories declined by 17%, or 42 million barrels, between the end of February and May 22. On an annual basis, inventories are down by 11.5 million barrels, while the deficit relative to the seasonal norm stands at 8.3 million barrels. Implied demand for motor fuel has remained remarkably resilient despite the substantial increase in pump prices. The latest weekly reading shows that refiners supplied 9.2 mbpd, the highest weekly figure in a year.

Domestic availability could become even tighter as the US increasingly serves as the marginal supplier of refined products, particularly jet fuel and diesel, in response to the persistent Persian Gulf crisis. The incentive for refiners, both in the US and globally, to prioritise distillate production has effectively become a necessity and has proven financially rewarding.

As US refiners have been comparatively insulated from the Middle East crisis, they have managed to maintain utilisation rates well above 90%, while focusing on the production and export of diesel and jet fuel. US export data reflects this trend. Combined overseas shipments of refined products are at or near record highs, with the strongest year-on-year growth seen in diesel and jet fuel. According to Energy Intelligence, citing Kpler data, US diesel and jet fuel exports averaged 3.5 mbpd during the first half of May, roughly 1 mbpd above the 2025 average. This has left gasoline as the neglected stepchild of the refinery slate. Elevated freight rates may also make US seasonal gasoline imports from Europe more cumbersome and less economical.

A look at CME RBOB/WTI spreads suggests they are already expensive, at least relative to previous years. For the summer months, this year's average stands at approximately $37.5/bbl, considerably higher than the 2024 and 2025 means of roughly $23.5/bbl. Yet for those who anticipate a genuine US gasoline shortage during the June–August period, the current RBOB crack curve may still appear undervalued.

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