Higher crude oil prices risk demand destruction, says Mirae Asset Sharekhan

Disclaimer: This article is written by Mohammed Imran, research analyst, Mirae Asset Sharekhan. Views expressed are his own. Readers' discretion is advised.  Global crude oil markets are facing one of their most difficult phases in recent years. Brent is hovering near $90/bbl after a strong year-to-date rally of nearly 50 per cent, but the move is starting to look tired as high prices begin to hurt demand, especially across Asia. The market is now pricing a wider energy shock driven by disrupted shipping routes, shrinking inventories, weaker refining activity and rising pressure on consumers.

 

The main source of uncertainty remains the US–Iran standoff and the continuing disruption around the Strait of Hormuz and supply-chain disruptions have kept roughly 8–10 million barrels per day of global oil supply offline. At the same time, attacks linked to Iran-backed groups in Lebanon, Gaza, Yemen and the Red Sea have kept shipping risks elevated.  The latest report suggest that shipping cost is now averaging around $10/b. Several vessels have also been hit by projectiles in and around Hormuz, making insurers, traders and shipowners more cautious.

 

 

The supply shock has so far been partly absorbed by emergency stock releases and floating inventories. We estimate that around 400 million barrels of strategic petroleum reserves and nearly 200 million barrels of floating oil storage have been used over the past six months. This has helped keep Brent below $100/bbl for much of the period. However, that cushion is thinning fast. OECD reserves have declined over the past six months, while floating storage has also fallen, leaving the market with less protection if disruptions continue into September.

 

Demand is now showing clear signs of stress. China’s economy has slowed below Beijing’s 4.5–5 per cent annual growth target at the start of the third quarter, and high fuel prices are weighing on industrial activity, transport and consumer spending. China has also helped stabilise the market by cutting crude imports by nearly 50 per cent from pre-war levels. Seaborne crude imports have fallen by about 5.4 mbpd, softening part of the supply loss from the Hormuz disruption. We expect global oil demand to decline by around 2 mbpd in 2026 if prices stay elevated and product shortages persist.

 

The International Energy Agency has also warned that the global supply deficit could worsen despite weaker demand. In its monthly report released on 12 August, the IEA said global inventories are likely to fall in the third quarter at twice the pace it had earlier expected because of ongoing disruptions from the US–Iran war. This is important because it shows that demand weakness alone is not enough to rebalance the market when physical flows remain restricted.

 

Refining is becoming the most visible pressure point. Global refining capacity improved by around 3 mbpd in July to be around 76mbpd but still far from 80mbpd at pre war level, as European refiners returned from maintenance and Asian refiners increased throughput after China loaded discounted Gulf crude during the temporary June ceasefire. Chinese refinery runs improved to around 13 mbpd, but the latest indicators show independent teapot refiners operating at only 52–55% of capacity. That is a clear sign of price sensitivity. Refiners are reluctant to buy expensive crude unless margins justify it.

 

Russia has added another layer of disruption. Ukraine attacked Russian refineries, tankers and major pipeline infrastructure at least 30 times in July, the second-highest monthly number of attacks since the war began in 2022. Russian crude-processing rates averaged only 3.51 mbpd in July, the lowest in 24 years. Crude production also fell to 8.89 mbpd, a six-year low. This matters because Russia is a major supplier of diesel and other refined products. Lower Russian processing tightens the product market even if more crude becomes available for export.

 

OPEC+ production increases may not be easy to deliver in this environment. OPEC crude output rose by 1.16 mbpd in July to 19.44 mbpd, but renewed military risks around the Gulf could limit how much of this oil reaches buyers. This is why headline supply increases should be treated carefully. In the current market, producing oil is not enough; the barrels must be safely shipped, insured and refined.

 

US data also show that inventory buffers remain thin. Gasoline inventories are 5.3 per cent below the seasonal five-year average, while distillate inventories are 12.7 per cent below average. US crude output remains strong at around 13.83 mbpd, but high production has not fully solved the shortage in refined products. Consumers do not use crude directly; they use gasoline, diesel, jet fuel and petrochemical feedstocks. This is why product markets can stay tight even when crude prices appear range-bound.

 

Our base case is that Brent remains in an $88–94/bbl trading range in the near term. Any fresh escalation around Hormuz, the Red Sea or Russian energy infrastructure could push prices back toward $100/bbl. If the Hormuz deadlock continues into late September, we see upside risk toward $95–97/bbl. On the other hand, a credible US–Iran diplomatic breakthrough could trigger a temporary correction, but downside should be limited unless shipping flows, refinery runs and product inventories all improve together.