Week in Review – Oil Prices Head for Strong Weekly Gain as Gulf Supply Risks Intensify

Oil prices pulled back on Friday after a sharp rally, but the broader trend remains firmly higher as disruptions across the Middle East continue to tighten global energy markets. WTI was trading more than $3 per barrel lower Friday morning after Thursday's gains, but still on track to finish the week roughly $7 per barrel higher.

The biggest concern remains supply. Fighting around key shipping routes has intensified, while disruptions to Saudi Arabian production and exports are removing barrels from an already tight market. Iran-aligned Houthis have expanded their presence around the Bab el-Mandeb Strait, one of the world's critical shipping chokepoints, while attacks have also affected Saudi energy infrastructure and shipping routes.

Saudi Arabia has been particularly affected. The International Energy Agency (IEA) reported that Saudi crude supply fell by 2.3 million barrels per day in August to 6 million barrels per day, its lowest level in more than three decades. The IEA has also lowered its 2026 Saudi supply forecast, citing expectations for a slower recovery in Middle East Gulf production.

The Strait of Hormuz remains significantly impaired. Vessel traffic through the strait fell to seven ships Thursday from 11 the previous day and remained well below the recent 10-day average of 15. Before the conflict, Hormuz was responsible for handling roughly one-fifth of global daily oil and liquefied natural gas supplies, making reduced traffic through the waterway an important source of continued market uncertainty.

There are some factors helping to offset the losses. U.S. crude production reached record levels last week, while OPEC+ production increased in August. Iraq posted the largest monthly increase among OPEC+ members, although Russian production declined. OPEC also lowered its 2026 global crude demand growth forecast to 400,000 barrels per day while raising its 2027 forecast to 2.4 million barrels per day.

The problem is that inventories provide less cushions than usual. U.S. crude and gasoline inventories are both about 5% below their five-year averages for this time of year, while distillate inventories are roughly 13% below average. Globally, the IEA said inventories declined by 3.1 million barrels per day in August as supply fell faster than demand.

That tightness is most evident in diesel. U.S. diesel futures moved above $5 per gallon this week for the first time since April 2022, while the national average retail diesel price surpassed $6 per gallon for the first time. Middle East supply disruptions are only part of the pressure. Ukrainian attacks on Russian refineries and Russia's restrictions on fuel exports have further tightened the refined-products market.

Diesel has been particularly sensitive because crude supply disruptions coincide with refining capacity under pressure. The IEA described the global refining system as stretched, while inventories that have helped balance the market continue to shrink.

The outlook is becoming more complicated as high prices begin weighing on consumption. The IEA now expects world oil demand to decline by 2.5 million barrels per day this year, a larger drop than previously forecast. However, supply is expected to decline even faster, meaning weaker demand alone may not be enough to relieve market tightness.

That imbalance is also changing expectations for how quickly the market could normalize. Several banks raised their oil price forecasts this week, citing expectations that Middle East shipping disruptions could persist. HSBC said the market is adjusting to a situation in which the Strait of Hormuz is neither completely closed nor fully open, and it does not expect the oil market to return to balance until around the middle of 2027.

Diplomatic talks and weaker demand may put some short-term pressure on prices, but the broader market remains supported by reduced Gulf production, constrained shipping routes, attacks on energy infrastructure, tight inventories and refining disruptions. Together, those factors are keeping volatility elevated and making the market increasingly sensitive not only to how much oil is produced, but also to how reliably it can move through critical shipping routes. Until those flows improve, supply concerns are likely to remain a key driver of crude and refined-product prices.

Prices in Review

Crude prices climbed throughout the shortened trading week, with the largest move coming on Friday. Following the Labor Day holiday on Monday, prices opened at $92.26 on Tuesday and advanced to $94.31 on Wednesday and $96.88 on Thursday. The rally accelerated on Friday, with crude reaching $104.32. From Tuesday to Friday, crude prices gained $12.06 per barrel, representing an approximate 13.1% increase.

Diesel prices gained momentum as the week progressed, with the strongest increase coming in the final session. Starting at $4.5804 on Tuesday, prices edged up to $4.6205 on Wednesday before making a larger move to $4.7964 on Thursday. Diesel then surged above the $5 mark on Friday, reaching $5.1481, the highest level of the week. From Tuesday to Friday, prices rose by $0.5677 per gallon, representing an approximate 12.4% increase.

Gasoline prices saw mixed movement early in the week before making a stronger move higher on Friday. Prices began at $3.2285 on Tuesday, rose to $3.2925 on Wednesday, then slipped back to $3.2288 on Thursday. The market then jumped to $3.4465 on Friday. Throughout the week, gasoline prices increased $0.2180 per gallon, representing an approximate 6.8% increase.