The oil market: supply, demand, inventories and refining

Supply and demand

Oil becomes fuel for cars, lorries, ships and aircraft, heating oil and feedstock for the petrochemical industry. Diesel and gasoil alone account for nearly 30 per cent of world consumption (IEA, Oil Market Report, 11 Sep 2026). Consumption follows the economy but falls when oil gets expensive.

Supply comes from the OPEC+ countries, which coordinate their output, and from producers outside the group, such as the US, Brazil and Norway, where each company produces what pays. The IEA estimates that the world will produce an average of 100.7 million barrels a day in 2026 (same report). In the short run neither consumption nor production changes much when the price moves, so a small surplus or deficit can cause large price swings.

Much of the trade passes through a few narrow straits. About 20 million barrels a day went through the Strait of Hormuz in 2024, around a fifth of world consumption (EIA, 16 Jun 2025). In August 2026, during the war in the Middle East, more than 10 million barrels a day of Gulf output was still shut in, and traffic through the strait was severely constrained (IEA, Oil Market Report, 11 Sep 2026).

OPEC and OPEC+

OPEC (the Organization of the Petroleum Exporting Countries) was set up in Baghdad in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Its membership has changed several times: Qatar left in 2019 and Angola in 2024 (opec.org), and on 28 April 2026 the United Arab Emirates announced that it would leave both OPEC and OPEC+ from 1 May 2026 (WAM).

OPEC+ is the cooperation between the OPEC countries and a group of producers outside OPEC, among them Russia and Kazakhstan, based on a Declaration of Cooperation from 10 December 2016. Norway is not part of it. The group sets production targets, often called quotas, for each country. Targets are not the same as output: some countries produce more and have to promise extra cuts later to compensate, while others stay below because their fields or export routes allow no more. Iran, Libya and Venezuela are exempt from the cuts (IEA).

Spare capacity is production that can be brought on quickly. The EIA defines it as production that can be brought online within 30 days and sustained for at least 90 days (eia.gov). Plenty of spare capacity is a buffer against outages elsewhere; little makes the market vulnerable. The buffer only helps if the oil can be shipped out.

Inventories show how tight the market is

Inventories are the buffer between production and consumption. They build when the market is in surplus and draw when it is in deficit, so stock figures show how tight the market is. From February to August 2026 observed global oil inventories fell by 507 million barrels (IEA, Oil Market Report, 11 Sep 2026).

• OECD inventories are reported monthly by the IEA and OPEC.
• US inventories are published weekly by the EIA, with commercial stocks and the Strategic Petroleum Reserve (SPR) shown separately.
• Cushing, Oklahoma, is where the WTI contract is delivered, and the EIA publishes separate weekly stock figures for it.

When stocks are high, later delivery is often more expensive than delivery now (contango), because storing pays. When they draw, prompt delivery becomes the most expensive (backwardation); see the forward curve.

IEA countries must also hold emergency stocks equal to at least 90 days of net imports; Norway, Canada and Mexico are exempt as net exporters. IEA countries have coordinated six collective stock releases, and the sixth and largest was announced on 11 March 2026 (iea.org).

Crude oil is not one product

Two properties matter most for what a crude is worth to a refinery:

• Density, measured in API degrees. The higher the number, the lighter the oil. The EIA calls crude above 35 degrees light and below 25 degrees heavy.
• Sulphur. Crude with little sulphur is called sweet, crude with a lot of sulphur sour. The EIA draws the line at 1 per cent.

Light, sweet crude yields a lot of petrol and diesel with simple equipment and is usually priced above heavy, sour crude. Heavy, sour crude needs extra units such as crackers, cokers and units that remove sulphur. When the price gap between light and heavy crude is wide, refineries with such units have an advantage (EIA, 21 Sep 2017).

Norwegian crudes differ. Troll Blend is light and low in sulphur (38.8 API degrees), while Johan Sverdrup is medium density with medium sulphur (28.3 API degrees), according to Equinor's crude assays from 25 Mar 2026 and 7 Jul 2026. The classes vary somewhat between sources.

Refineries and the crack spread

A refinery turns crude into products in three steps. In distillation the oil is heated and separated by boiling point. In conversion heavy molecules are broken into lighter ones with heat, pressure, catalysts and sometimes hydrogen; the most common method is called cracking. Finally the streams are blended into finished products (EIA).

The simplest measure of what refiners earn is the crack spread: the difference between the price of the products and the price of the crude they are made from. The EIA uses the 3-2-1 spread, in which three barrels of crude become two barrels of petrol (gasoline) and one barrel of diesel, roughly as in a typical US refinery. It leaves out other costs (EIA). The IEA publishes indicative refining margins every month that also include energy costs (methodology note, August 2024).

In August 2026 refining margins reached record levels in the Atlantic Basin as the gap between diesel and crude prices widened sharply (IEA, Oil Market Report, 11 Sep 2026).

The reports the market follows

Four reports are widely used to follow the balance between supply and demand. They rely on different data and often give different estimates.

The IEA report also has a table of production, targets and capacity for each OPEC+ country. The analysis page shows Brent, WTI, TTF and Henry Hub alongside the energy stocks.

How to read an oil headline

Many oil news stories are about decisions and forecasts, not barrels actually produced. A few questions help:

• Target or output? When OPEC+ “raises production”, it is usually the targets that go up. How much more oil arrives depends on capacity, on whether the countries were already below or above target, and on whether they must compensate for earlier overproduction. In August 2026 Saudi Arabia produced 5.97 million barrels a day against a target of 10.42, while Kazakhstan produced 1.90 against a target of 1.62, according to the IEA's calculation of the targets (Oil Market Report, 11 Sep 2026).
• One week is not a trend. US inventory figures swing with imports, exports and refinery runs. Look at several weeks, and at product stocks.
• Which price? “The oil price” in the news is usually the nearest Brent futures contract. In September 2026 it traded around USD 105 per barrel, while physical benchmarks were significantly higher (IEA, Oil Market Report, 11 Sep 2026).
• How much did the forecast change? In September 2026 the IEA cut its estimate of world oil consumption in 2026 by 940,000 barrels a day from the month before. The change often says more than the level.

Sources

• Oil Market Report – September 2026 – IEA (11 Sep 2026) – OPEC+ output against targets and capacity, shut-in Gulf output, stock draws, diesel share, refining margins and price gaps; read 5 Oct 2026
• Brief History – OPEC – founding, countries that have left, the 2016 Declaration of Cooperation
• UAE announces decision to exit OPEC & OPEC+ – WAM (28 Apr 2026)
• Oil security and emergency response – IEA – 90 days of net imports, Norway's exemption, collective actions
• Changing quality mix is affecting crude oil price differentials and refining decisions – EIA (21 Sep 2017) – API gravity, sulphur and complex refineries
• Crude oil assays – Equinor – Troll Blend and Johan Sverdrup

The guides are written by OESA students to explain concepts and how things fit together. They are not investment advice. Figures that are not definitions carry a source and a date; if you find an error, let us know at philipstave@oesa-global.com.