Oil supply recovers, but 'no war, no peace' keeps escalation risks elevated

The production recovery also comes at a critical moment for OPEC, which is assessing members' sustainable production capacity ahead of setting output limits for 2027. Higher reported production could strengthen Saudi Arabia's and Iraq's positions in those negotiations, while also highlighting growing competition with the UAE, which left OPEC in May to escape the group's production restrictions. Both Saudi Arabia and the UAE have recently announced steep cuts to their official selling prices for December crude deliveries, adding to signs of intensifying competition for market share as regional supplies recover. Together, these developments could increasingly shift the crude oil market's attention from supply disruptions towards the risk of future oversupply.

Crude production recovers, while distillate and LNG supplies remain well below pre-war levels

The situation is markedly different in the markets for refined fuels and natural gas. While Gulf crude production and exports have recovered substantially, refinery operations and product shipments remain constrained by damaged infrastructure, logistical bottlenecks and ongoing security concerns. The resulting shortage of middle distillates continues to support diesel and jet fuel prices, with diesel benchmarks in both New York and Rotterdam trading near USD 180 per barrel, almost twice the price of Brent crude.

The continued tightness is also reflected in US inventories, where distillate stocks recently fell below 100 million barrels, their lowest level in more than two decades. This leaves the market particularly vulnerable to another supply disruption just as winter heating demand increases. Meanwhile, elevated diesel prices continue to feed through to transportation, agriculture and industrial costs, potentially sustaining inflationary pressures despite the recent slump in crude prices. The risk of more persistent inflation could, in turn, influence inflation expectations, bond yields, the dollar and central bank interest rate decisions, extending the impact of tight fuel markets well beyond the energy sector.

A similar divergence is evident in the LNG market. Although October saw the strongest recovery in Gulf LNG shipments since the war began, Qatari traffic through Hormuz remained well below pre-war levels. This uneven recovery leaves European and Asian buyers competing for limited available cargoes ahead of peak winter demand. With European gas inventories already entering winter at unusually low levels, colder weather could quickly renew upward pressure on prices, already up around 190% compared with this time last year.

Energy futures deliver exceptional returns despite November selloff

Despite the sharp November selloff, energy futures have delivered exceptional total returns this year, with Brent up 107%, WTI 92%, and gasoil and NY ULSD surging 194% and 165%, respectively. These gains reflect not only higher prices but also the significant positive roll yield generated by persistent backwardation, as tight physical supplies have kept nearby futures trading at substantial premiums to deferred contracts. This effect has been particularly pronounced in distillates, where war-related supply disruptions have created a pro-longed period of exceptional tightness.

US natural gas provides a striking contrast. While the prompt-month contract has lost around 11% year-to-date, its total return is negative 22%, reflecting the negative impact of rolling positions through periods of contango. The divergence highlights how futures curve structure can significantly amplify returns in tight markets while eroding performance when supplies are more comfortable.

An increasingly asymmetric outlook

The coming months therefore present two very different scenarios. A diplomatic breakthrough that restores secure shipping through Hormuz and allows refineries and LNG facilities to resume normal operations could accelerate the decline in energy prices, particularly for diesel, jet fuel and natural gas, where supply constraints remain most pronounced.

Conversely, renewed military escalation could quickly reverse some of the recent crude selloff, especially if attacks target critical infrastructure or disrupt the alternative export routes that have become essential to maintaining regional flows. The combination of depleted inventories, expensive freight and limited spare logistical capacity would leave the market particularly vulnerable to another shock.

For now, the increasingly bearish crude outlook contrasts with continued physical tightness in fuel and LNG markets. The market may be learning to live without peace, but that does not mean it has eliminated the risks associated with war.