Oil Prices Tumble Over 2% as Demand Concerns Outweigh Middle East Supply Risks

Oil settled down more than 2% on Thursday, reversing course after a week of gains, as investors focused on signs of weaker global demand and a sharp build in US crude inventories.

Brent and US crude futures contracts pared losses after being down over 3.5% earlier in the session following reports that Yemen's Houthis had targeted a Saudi Aramco refinery with drones, renewing concerns over supply disruptions in an already tight global market.

Brent futures finished US$1.91, or 2.15%, lower at US$87.07 a barrel following a six-session rally, while US West Texas Intermediate (WTI) crude closed down US$2.02, or 2.4%, at US$81.25 a barrel after advancing for five sessions.

Why the Selloff? Demand Fears Take Center Stage

Investors weighed data from the US Energy Information Administration on Wednesday that showed US commercial crude oil inventories made their largest weekly gain since January 2023 as exports slumped. Crude inventories rose by 17.4 million barrels to 424.4 million in the week ended August 7, their highest since June 5, the EIA said.

The sharp build in inventories suggests weakening demand in the world's largest oil consumer, raising questions about the sustainability of recent price gains.

Compounding the demand concerns, OPEC lowered its world oil demand growth forecast for 2026 to 580,000 barrels per day in its monthly oil market report. The International Energy Agency (IEA) also said it expected a contraction of 1.6 million bpd in consumption this year, versus a drop of 1 million bpd forecast last month, with demand curtailed by higher prices and restricted supply due to the US-Israeli war with Iran.

The Houthi Factor: A Partial Recovery

Prices, however, were pressured after a report from Yemen's Houthi-run Saba news agency said the militant group attacked an Aramco refinery in Saudi Arabia's Jazan with two drones on Thursday. News of the attacks sent diesel cracks to an all-time high. According to Saudi Aramco's website, the Jazan refinery has the capacity to produce 250,000 bpd of ultra-low sulfur diesel.

A Houthi military source said the attack was in response to what the group described as Saudi violations of Yemeni airspace and sovereignty in Saada and Hajjah provinces. Saudi Arabia did not immediately comment on the report.

The attacks briefly pushed prices off their session lows, underscoring the market's sensitivity to any supply disruptions in the Middle East.

The Strait of Hormuz Standoff

Supply disruptions in the Middle East and the Black Sea region continued to support oil prices, with the US and Iran making competing claims over the Strait of Hormuz, through which about 20% of global oil supply passed before the start of the Iran war.

The Strait is "under Iran's control and management," the recently appointed head of Iran's Basij paramilitary unit said on Thursday, a day after US President Donald Trump said the United States had "total control" of the waterway.

Iran and the United States remain at loggerheads over efforts to agree a permanent end to the war in the Gulf, according to a senior Iranian source, who said there had been no progress in talks to revive the interim deal agreed in June and define a time frame to implement it.

US Defence Secretary Pete Hegseth said on Thursday that the United States military could keep a blockade on Iranian ports for as long as needed.

Traders continued to assess the scale of disruption after US Energy Secretary Chris Wright said about 9 million bpd was moving through the strait weekly, while shipping data showed vessel crossings excluding container ships dropped to five on Wednesday, their lowest in three weeks. Before the war, 125 to 140 vessels passed through the crucial waterway each day.

"Conflicting stories continue to drive the narrative as to who controls the Strait of Hormuz and just how many ships are making passage," said Tim Snyder, chief economist at Matador Economics.

Russian Supply Tightens

Adding to market tightness, Russia's seaborne oil product exports fell sharply in July after Ukrainian drone attacks led to unplanned maintenance at key domestic refineries, industry sources said, and Reuters' calculations showed.

In the Russian city of Orsk, an oil refinery that was hit by a Ukrainian drone strike two days ago has been forced to shut down, and repairs could take up to six months, the regional governor said on Thursday.

The attacks on Russian refining capacity have removed significant volumes of oil products from the market, adding another layer of supply uncertainty to an already volatile global energy landscape.

The oil market remains caught between competing forces: weak demand signals from the US and major forecasters, and persistent supply risks from the Middle East and Russia. While the Houthi attack on the Jazan refinery and the ongoing standoff over the Strait of Hormuz provide a floor under prices, the demand-side concerns are increasingly difficult to ignore.

The conflicting narratives over the Strait of Hormuz who controls it and how much oil is flowing through are likely to keep traders on edge in the near term. As Tim Snyder put it, "conflicting stories continue to drive the narrative."

The next few weeks will be critical. If demand data continues to soften, oil prices could face further downside, even as geopolitical risks remain elevated.