The Middle East conflict, now in its eighth month, continues to impact global energy markets and drain stockpiles as major economies act to buffer rising crude oil prices.
The International Energy Agency (IEA) noted in its September 2026 report that global oil inventories have declined by more than 500 million barrels – which amounts to 2.8 million barrels per day or 2.8% of average daily global crude demand – since February 2026 when the conflict began. While some Middle East energy flows have reached the Asia-Pacific and Western markets, the volumes are significantly lower than pre-war levels.
At an industry conference in London in early October, one of the large energy trading firms noted that around 12 million barrels per day of crude oil and 2 million barrels per day of refined products were being exported from the Middle East, which is sharply below the 20 million+ barrels per day of crude oil and refined products before the war.
Backwardation Compounds the Challenge of Rebuilding Inventories
The depletion of oil in storage reduces the flexibility a market can leverage when prices get too high. When markets are in contango, when the front-month prices are trading at a discount to the forward prices, traders typically look to store cargoes for future delivery. In a backwardated market, where front-month prices are trading at a premium to forward prices, they will typically look to draw barrels from storage and place them into the market.
The term structure in the futures curve reflects a tight supply situation, with backwardation strengthening across the crude oil, diesel and gasoline markets in the months since the conflict in Iran began, CME Group data shows. The NY Harbor Ultra-Low Sulfur Diesel (ULSD) futures market shows the steepest backwardation, with the December 2026/December 2027 calendar spread widening to nearly $1.40 per gallon (or $58.8 per barrel) in September, compared to approximately $0.02 per gallon at the same point in 2025. This price gap, driven by both decreasing distillate inventories and stronger export demand, according to EIA data, points to tightening global supply.
The supply-and-demand situation, coupled with the strong backwardation, means that replacing those stockpiles is becoming increasingly difficult to do. This is likely to present the market with further challenges in trying to bring the market back into balance.
Diesel Prices Reach Record Premium Over Crude Oil
The crude oil market disruption caused by the Middle East conflict has spread to refined products and shipping markets. The principal reason is a lack of refining capacity and a shortage of ships to export cargo to the main demand centers in Asia-Pacific and Europe. The crack spread, which is a measure of profitability for a refiner when processing a barrel of crude oil into a refined product, has been rising sharply due to the conflict.
The middle distillates have been most impacted, with prices reaching twice that of crude oil. In the case of diesel, the latest data shows that prices in ULSD futures reached around $220 per barrel in September, which is over $100 per barrel above the crude oil price. A shortage of refining capacity has reduced the availability of refined products, with the biggest impact being felt in both diesel and jet fuel – two key middle distillate products. Diesel crack spreads have also been impacted by Ukraine's targeting of Russia’s refining infrastructure, leading to a halt in exports to international markets.
Market Focus Pivots to Higher Strikes
Amid this heightened volatility, CME Group’s WTI Crude Oil options market also saw market participants constantly adjust their positions. Comparing options open interest between March 2, 2026 (right after the Iran conflict), and October 14, 2026 (at the time of writing), illustrates a market bracing for prolonged geopolitical risk.
Initially, open interest was concentrated on price levels below $80 per barrel. As uncertainty persisted and prices rose, positions in lower strike prices significantly were reduced while investors built up massive exposure to higher target prices, creating a longer-tailed, right-skewed distribution.
There was an increase in extreme price strike levels, with contracts above $200 per barrel climbing to close to 10,000 contracts. Most notably, the $150 strike price seemingly emerged as a key upside-price checkpoint, with open interest almost doubling to nearly 40,000 contracts.
The Physical Price of Crude Oil Reflects Current Market Anxiety
With WTI and Brent futures trading around the $100 per barrel level, spot crude oil is trading in excess of these levels at around $130 per barrel as of mid October 2026. This partly reflects the more immediate supply-and-demand shocks in the market due to the acute shortages caused by two geopolitical events in Iran and Ukraine.
The drawdown in inventory levels and limited refining capacity is also directly impacting prices across products, with markets concerned about the prospect of severe shortages in diesel and gasoline in the months ahead. The continuous shifts in futures curve structure reflect ongoing adjustments by market participants, making curve dynamics an indispensable metric for gauging global market stability.
Volatility in the energy markets, led by crude oil, is expected to remain elevated amid the absence of a diplomatic solution in the Middle East and rising tensions between Saudi Arabia and the Houthis in Yemen. The conflict’s impact has clearly spread to the diesel markets where prices have reached $105 per barrel over the price of crude oil, resulting in higher transportation costs in the broader economy.
An effective way to hedge against the uncertainty is through futures and options as crude oil prices swing above and below $100 a barrel depending on the geopolitical risks.
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