Oil Prices Fall Despite New Attacks and Below-Average U.S. Inventories

Oil prices moved lower this morning after a volatile overnight session, with crude futures giving back earlier gains despite escalating military tensions and new disruptions to energy infrastructure. WTI futures fell by more than $1 per barrel after climbing to nearly $86 per barrel overnight, while Brent crude traded at $90.38 after briefly reaching $93.31.

The United States carried out another wave of strikes against Iran overnight after President Donald Trump promised a strong response to ballistic missile attacks on American forces in Jordan. The U.S. military said the two-hour operation targeted Iranian Revolutionary Guard command centers and drone facilities.

The conflict has also expanded beyond Iran. U.S. and Saudi forces launched strikes against Iran-aligned groups in eastern Iraq, while a drone reportedly struck a U.S.-owned floating storage tanker at Egypt's Damietta port in the Mediterranean Sea.

The attack caused a fire aboard the Energos Winter that spread to another vessel, the Gaslog Salem. The incident is important for Egypt's natural gas market because the Energos Winter can process approximately 450 million cubic feet of gas per day. That represents about 7% of Egypt's daily gas consumption and 16% of its total LNG receiving and regasification capacity.

Another disruption was reported at the Black Sea's CPC crude terminal, where an oil tanker was struck while loading cargo. The port suspended loading operations following the incident, although pipeline facilities continued operating. The interruption adds another layer of uncertainty because even when crude production and pipeline systems remain online, suspended vessel loadings can delay oil exports.

Markets are still closely watching the Strait of Hormuz. Talks between Iran and Oman over the management of the waterway are continuing, raising some hope that conditions could improve. However, analysts remain focused on how much oil is actually moving through Hormuz and other important routes, including the Bab el-Mandeb Strait in the Red Sea.

The possibility of diplomatic progress helped pull prices back from their overnight highs. Still, the continued strikes and uncertainty surrounding safe vessel passage mean that geopolitical risk remains an important part of current oil prices.

Refinery conditions are also becoming increasingly important. U.S. refinery operating rates rose to their highest level since 2019 last week, supported by record-high refined product margins. Strong domestic refinery activity could increase the supply of gasoline, diesel and other fuels in the United States.

Globally, however, refinery activity remains much weaker. Goldman Sachs Research estimates that global refinery runs are down 6.5 million barrels per day compared with last year. Although runs have recovered slightly from April lows, average July activity was estimated to be at its lowest seasonal level since the COVID-19 pandemic.

Continuing attacks on refineries in the Middle East and Russia have contributed to the decline. Refinery utilization in China has also remained low because of weaker demand and the lack of sustained crude imports. China's crude oil inventories remain relatively strong at approximately 1.2 billion barrels, although they have fallen by around 54 million barrels since early May.

The reduction in global refinery operations matters because crude oil availability does not automatically translate into adequate supplies of diesel, gasoline and other finished fuels. Persistent refinery outages could tighten refined product markets even when crude remains available. Diesel markets may be particularly vulnerable if refinery activity in the Middle East and Russia remains disrupted.

U.S. inventory data added another supportive signal for oil prices. The EIA reported that crude inventories declined by 7.2 million barrels during the week ending July 24, significantly more than the 1.3-million-barrel decline expected by Reuters. Inventories at Cushing, Oklahoma, fell by another 800,000 barrels.

Gasoline inventories increased by only 70,000 barrels, compared with expectations for a 700,000-barrel decline. Distillate inventories rose by 1.1 million barrels, exceeding the expected increase of 100,000 barrels.

Despite the product builds, overall inventories remain below normal seasonal levels. U.S. crude inventories are approximately 7% below the five-year average, gasoline inventories are about 6% below average, and distillate supplies are approximately 9% below average for this time of year. Those limited inventory cushions leave markets more exposed if geopolitical disruptions begin to reduce physical supplies.

Broader economic uncertainty is also influencing the outlook. The Federal Reserve left interest rates unchanged at its July meeting and provided little guidance about its next move. Three Federal Reserve officials supported a rate increase, and the bond market is now pricing a 60% probability of an increase at the September meeting. Goldman Sachs Research, however, expects softer core inflation to keep the Federal Reserve on hold through the remainder of 2026.

Goldman Sachs Research also lowered its forecast for second-quarter U.S. economic growth from its previous estimate by 0.8 percentage points to 1.8%. The revision reflects recent trade and inventory information, Strategic Petroleum Reserve drawdowns, and the economic effects of disrupted oil flows and higher prices related to the war with Iran.