The easing of military tensions between the US and Iran and the shift in US President Donald Trump's stance regarding potential new military operations served as the primary catalyst for the recent drop in oil prices. However, behind the dramatic de-escalation in the energy market lies a much deeper reversal: despite the largest oil supply shock in history, global production has now outpaced consumption. Oil retreated by roughly 25 dollars within a single week, reaching its lowest level in three months, while on Tuesday, November 10, prices temporarily dipped below 90 dollars per barrel. This development stands in stark contrast to assessments prevailing in October, when markets were pricing in a major new military escalation in the Middle East.
Throughout October, oil traded daily above 100 dollars per barrel, reaching a four-year high of 114 dollars during the final session of the month.Donald Trump had repeatedly implied that American and Israeli strikes against Iran would resume following the US midterm elections. However, shortly before the elections he shifted his position, arguing that resuming attacks was no longer necessary. Simultaneously, the sweeping victory of the Democrats in the November 10 elections, in a development interpreted as a strong rebuke of Trump's Iran policy, sent a signal that Congress may mount resistance against continuing the war. Political developments certainly contributed to falling prices. However, they are insufficient to explain the true picture of the market. Oil has returned to its market fundamentals, and these now appear far stronger than anyone would expect amid such a massive geopolitical crisis.
The oil market avoided the 200-dollar scenario: How the Strait of Hormuz blockade was bypassed
The trajectory of the oil market since the outbreak of the war with Iran has been characterized by impressive adaptability. Many analysts had warned of an extreme scenario under which prices could exceed 200 dollars per barrel if Iran halted tanker transit through the Strait of Hormuz, one of the world's most critical energy chokepoints. However, the market never came close to the 2008 record high, nor even to the levels recorded in 2022 at the start of the Russia-Ukraine war. Energy companies and carriers managed to adapt to new conditions by rerouting cargoes via pipelines and organizing complex oil transport operations through the Strait of Hormuz, even with military support.
On certain days over recent months, oil flows from the Middle East even exceeded pre-war averages. Of course, the situation has not returned to normal. Shipments continue to exhibit wide fluctuations and, according to energy data tracking firm Kpler, stood at roughly 70% of pre-war levels over the past week. According to Natasha Kaneva, head of global commodities research at JPMorgan, oil transits through the Strait of Hormuz had dropped to 9.8 million barrels per day at the start of the war in March. Last week, however, they had rebounded to 20.7 million barrels per day, approaching the 24.7 million barrels moved daily from the Middle East prior to the outbreak of the conflict. The gap remains significant: roughly 4 million barrels per day below pre-war levels.
Non-Middle East production increased: The role of Latin America and Exxon
To offset losses from the Middle East, major oil companies ramped up production in other regions of the globe, with particular emphasis on Latin America. Crude oil flows from regions outside the Middle East increased by 1.5 million barrels per day compared to the corresponding period of the previous year. Despite this increase, a daily deficit of roughly 2.5 million barrels persisted relative to previous energy flow levels. The strengthening of non-Middle East production is gradual yet steady, while energy groups continue to see significant prospects in new regions. Indicative is Exxon's announcement on Tuesday, November 10, stating that it has taken preliminary steps that could lead to its return to Venezuela after a two-decade absence. However, neither rising global production nor the gradual restoration of Middle East shipments suffices on its own to explain the market's rebalancing. The game-changing element lies on the other side of the equation: oil demand.
Collapse of oil demand: The great paradox of the energy market
The missing factor from the equation was the sharp retreat in global oil demand. According to JPMorgan, oil consumption fell by an average of 3.3 million barrels per day during the war, with the deterioration becoming even more pronounced in recent months. Specifically, in September and October, consumption dropped by 3.8 million barrels per day. In other words, the decline in demand managed not only to cover the deficit created by supply disruptions, but also to push the market into a surplus of approximately 1.3 to 1.4 million barrels per day in October. This is the great paradox of today's energy market: while the war triggered an unprecedented supply shock, global consumption fell so sharply that the market swung from shortage to surplus. The drop in demand is partly attributable to high prices, which forced consumers and businesses worldwide to curb energy consumption and make difficult decisions regarding fuel usage. However, the impact of prices was not as decisive as one might assume.
Why gasoline and diesel consumption is falling: The refinery bottleneck
The fuel market faces an additional structural difficulty: limited refining capacity. Indeed, diesel had recorded historic price highs a few weeks ago as Ukraine launched drone attacks against Russian refineries. The situation temporarily de-escalated following the energy truce brokered by Donald Trump, which allowed a respite of several weeks. Simultaneously, US gasoline prices are heading toward a new four-year high for 2026, although on Tuesday they dipped below 4 dollars per gallon for the first time in several months. Furthermore, gasoline demand has been on a downward trajectory for years as electric vehicles steadily gain ground, primarily outside the US, while engine technology improves energy efficiency. According to Pavel Molchanov, investment strategy analyst at Raymond James, annual per capita gasoline consumption in the US is expected to drop to 390 gallons in 2026, the lowest level since the pandemic.
This represents a significant decline compared to 440 gallons a decade ago. However, the primary cause behind falling demand for both diesel and gasoline is less obvious: constraints in refining capacity. The planet lacks sufficient refining infrastructure to replace lost output from the Middle East and Russia. As a result, refineries globally are operating at the limits of their capabilities. Simply put, even if sufficient crude oil exists, the market cannot convert it quickly enough into usable fuels. The deficit in refining capacity is ultimately absorbed through reduced global demand for gasoline, diesel, and crude oil that would otherwise be processed into fuels.
US oil inventories rebound: New negotiating leverage for Trump
The oil surplus now creates room to replenish strategically vital inventories in the US, primarily in the Cushing, Oklahoma hub, which constitutes one of the country's most important oil distribution and storage centers. According to the US Energy Information Administration, inventories in Cushing had fallen below minimum operational levels in July. They have now rebounded to their highest level since May. This development offers significant breathing room to the American market, creating additional storage buffers and reducing the risk of a new oil price crisis. Simultaneously, accumulating a surplus over one or two months could hand Donald Trump a major negotiating advantage, allowing him to wait until economic pressure on Iran intensifies.
The economic blockade of Iran and inflation exceeding 70%
The American blockade of Iranian ports appears to be yielding results. According to the analysis, Iran has not conducted any oil exports through legal channels since August, while the economic blockade has dramatically weighed on the country's economy. Annual inflation in Iran has exceeded 70% over the past year, reaching its highest level since World War II. Under these conditions, Donald Trump may believe that time is working in favor of the US, as accumulating oil stockpiles and a weakening Iranian economy ratchet up pressure on Tehran. However, the political and military dimension of the conflict is far more complex.
Trump's electoral defeat and Iran's leverage in the Strait of Hormuz
The sweeping electoral victory of the Democrats may somewhat constrain the US president's maneuvering on the Iran front. However, the new Congress will not necessarily possess the decisive power required to force the US into an immediate exit from the war. At the same time, the so-called "blue tsunami," as the Democratic electoral sweep was characterized, highlighted that Iran also continues to hold significant bargaining weapons. Donald Trump has been politically weakened, while the election demonstrated that Iran can inflict severe economic damage globally by maintaining a military presence in the Strait of Hormuz. Tehran's ability to threaten one of the planet's most vital energy arteries remains a source of instability for international markets, regardless of the temporary de-escalation in prices.
Dan Pickering, founder and chief investment officer of Pickering Energy Partners, warned that current conditions do not create the prerequisites for a swift and acceptable resolution to the conflict. "This is not a recipe for a quick and acceptable end to the conflict. It is a recipe for the continuation of the status quo," he stated characteristically. The conclusion is that falling oil prices do not merely reflect a shift in Donald Trump's stance toward Iran. They reflect a deeper upheaval in the global energy market, where rising production, adapted transport networks, and above all collapsing demand have forged a new surplus. However, as long as the Strait of Hormuz remains a geopolitical weapon in Tehran's hands, the energy market will remain exposed to fresh turbulence.
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