Oil prices turn lower as Bessent says U.S. may have Iran deal "today or tomorrow"

Commercial crude inventories fell by 7.2 million barrels last week, while another 3.8 million barrels were removed from the Strategic Petroleum Reserve. Refineries operated at roughly 97% of capacity nationwide, with some Midwest plants effectively running flat out as strong fuel prices and expanding exports encouraged refiners to push every available barrel through the system.

Takeaways

  • U.S. commercial crude inventories fell by 7.2 million barrels, while the Strategic Petroleum Reserve declined by another 3.8 million barrels.

  • According to Kpler’s Matt Smith, roughly 70% of the crude withdrawn from onshore storage worldwide over the past four months came from U.S. commercial inventories and the SPR.

  • Refinery utilisation has reached 97.2%, leaving very little spare capacity to replace lost fuel production if another disruption hits.

  • I was very reluctant to chase the geopolitical rally in crude, but the scale of the inventory draw is making that position increasingly difficult to maintain.

Precariously Low Levels

I have resisted the more dramatic oil calls throughout the conflict with Iran. The market has repeatedly found replacement barrels, rerouted cargoes and leaned on emergency reserves whenever the geopolitical temperature has risen. Traders who chased every headline often ended up paying for a risk premium that vanished almost as quickly as it appeared.

But the latest U.S. inventory data are becoming much harder to brush aside.

The Energy Information Administration reported that commercial crude stocks fell by 7.2 million barrels in the week ending July 24, leaving inventories at 404.5 million barrels, roughly 6% below the five-year seasonal average. The Strategic Petroleum Reserve declined by another 3.8 million barrels to 307.7 million, taking the combined weekly draw to almost 11 million barrels. At the same time, U.S. refiners processed 17.3 million barrels per day and ran at 97.2% of capacity.

America is now being asked to carry several parts of the oil market at once. It is feeding domestic refineries, supplying crude and petroleum products to overseas buyers, and drawing down both commercial inventories and the SPR to replace barrels no longer moving freely through their usual Middle Eastern routes.

That has helped keep the price shock contained, but the cushion is being used up in the process. The barrels supporting the global market today are the same barrels that would normally protect the United States against the next hurricane, pipeline outage or further disruption to imports.

According to Kpler’s Matt Smith, the combined U.S. commercial and strategic crude inventories have declined by nearly 20% since early April. More strikingly, he estimates that roughly 70% of the crude withdrawn from onshore storage worldwide over the past four months came from U.S. commercial inventories and the SPR.

In plain English, the world has covered much of the recent supply shortfall by reaching into America’s storage tanks.

The regional breakdown makes clear that this is not a single-hub problem. Inventories across several major U.S. regions are already sitting at, or below, the lower end of their normal seasonal range.

Those barrels are not simply oil sitting idle in storage. They are the market’s first line of defence against delayed imports, pipeline outages, refinery disruptions and hurricanes. When regional inventories are comfortable, refiners can replace a late cargo or temporary supply loss without immediately bidding prices sharply higher. When stocks are already stretched, each additional disruption carries more pricing power because fewer replacement barrels are available nearby.

Seen through that lens, Commodity Context founder Rory Johnston’s description of U.S. crude and gasoline inventories as “precariously low” feels increasingly justified. America is not about to run out of oil, but its margin for error is narrowing quickly. Commercial stocks are thin, the SPR is sitting at its lowest level in more than four decades, and refineries are already running close to full tilt. The next interruption would therefore hit a market with less inventory to absorb it and much less room to increase throughput.

That refinery number deserves more attention than it is getting. A utilization rate of 97.2% is clearly supportive for crude demand, but it also tells us that the system has almost no spare refining capacity left. Maintenance still has to happen, plants still suffer unplanned outages, and much of the country’s refining, pipeline and export infrastructure remains concentrated along the Gulf Coast.

Mother Nature does not care that the refineries are already running flat out. A major hurricane can force plants to shut before landfall, cut power, flood facilities, interrupt pipelines and close ports. Even when the physical damage is limited, restarting is rarely as simple as flicking a switch. Refineries need electricity, staff, inspections, feedstock and safe access before they can resume operations. With the rest of the system already close to capacity, even a temporary loss of Gulf Coast output would be difficult to replace.

For traders, that means gasoline, diesel and jet-fuel markets could tighten much faster than the headline U.S. production number suggests. Producing crude is only the first step. The oil still has to reach a refinery, be turned into usable fuel and then move through pipelines, terminals and ports to the end market.

The United States could therefore continue producing plenty of crude while fuel supplies tighten and product prices rise. The bottleneck would simply have moved from the oil field to the refinery gate.

The SPR presents the same tightening problem from a different angle. At 307.7 million barrels, the reserve is not close to empty and Washington can still release more crude. But estimates of a practical operating floor around 180 million to 200 million barrels exist for a reason.

The oil is stored in underground salt caverns, and not every barrel can be withdrawn with the same speed and efficiency. As those caverns are drawn down, pressure falls, withdrawal rates can slow, and the crude remaining near the bottom becomes harder to recover cleanly because it sits closer to brine, sediment and heavier residue.

The headline stockpile therefore overstates how much oil could be delivered quickly if the reserve were pushed much lower. The reserve still contains plenty of crude, but the lower it falls, the less useful each remaining barrel becomes in an emergency.

In other words, it is the oil market’s circuit breaker, not a permanent source of supply. It can slow a price shock and buy policymakers time, but it cannot reopen the Strait of Hormuz, repair damaged infrastructure or replace lost exports indefinitely.

Every barrel released today is one less barrel available for the next hurricane, pipeline outage or geopolitical shock. Washington is using part of tomorrow’s emergency reserve to contain today’s price increase while commercial inventories are being depleted at the same time. That leaves the United States with a smaller buffer on both fronts if another interruption arrives before stocks can be rebuilt.

The timing of any recovery is therefore becoming increasingly important. Additional production may eventually reach the market, refinery runs will not remain near 97% forever and weaker consumption could slow the pace of the draw. None of that changes the immediate position: U.S. inventories are falling now, refineries are already operating close to their practical limit and strategic barrels are still being released.

The EIA expects global inventories to fall by another 2.2 million barrels per day during the third quarter before production growth begins rebuilding stocks in the fourth quarter. That offers a plausible route out of the current squeeze, but it also underlines the timing risk. A projected inventory build later in the year does not replace a barrel required today.

If the United States eventually becomes unwilling or unable to continue drawing stocks at the current pace, the burden moves elsewhere. Prices must rise far enough to weaken global consumption, or the United States must cut crude and refined-product exports and retain more barrels at home.

Lower U.S. exports would not solve the global shortage. They would push it back into the international market, forcing overseas refiners to compete more aggressively for alternative supplies, pay higher prices or reduce their own operating rates. The tightening would then become visible through stronger prompt crude prices, wider regional spreads and higher fuel prices rather than another quiet weekly withdrawal from U.S. storage.

This is also why spare production on paper should not be confused with immediately deliverable supply. A barrel that cannot move safely through the Strait of Hormuz is not equivalent to one already stored on the U.S. Gulf Coast. Nor is every grade of crude interchangeable. Refiners are configured to process particular qualities of oil, while longer shipping routes, tanker delays and higher insurance costs all affect when and where replacement barrels become available.

Oil remains a physical market. Location, quality and delivery time matter as much as the headline number of barrels theoretically available.

I was very reluctant to chase the geopolitical rally in crude. Oil has punished that reflex often enough, and the market repeatedly found ways to replace disrupted barrels or draw them out of storage.

But the inventory story is becoming much harder to fade.

The United States has limited the price impact of the current supply disruption by drawing down commercial stocks, releasing strategic barrels, running refineries close to full capacity and continuing to supply overseas buyers. That response has worked, but it has also left the country with less commercial inventory, less refining headroom and a smaller emergency reserve.

If another interruption arrives before those stocks can be rebuilt, the first adjustment is likely to come through higher prompt crude and fuel prices. Demand will not disappear immediately because motorists, airlines, freight operators and industry cannot quickly replace oil. Prices would therefore need to rise far enough, and remain high for long enough, to force consumers and businesses to reduce usage.

Only then would broader demand destruction begin through fewer discretionary journeys, reduced airline capacity, slower freight activity and, eventually, weaker economic growth.

For traders, that is the real warning in the latest inventory data. The next supply loss would meet a much thinner U.S. buffer, leaving price to do far more of the balancing work.

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