The oil market is heading toward a problem it can’t price its way out of, as disruptions in the Gulf create a mismatch between global demand and available fuel supply.

Two buffers are cushioning the shock — higher prices and inventory drawdowns. The adjustment so far has come from price-reducing demand and inventories filling the shortfall, which is why the shock is showing up more in prices than empty pumps. But neither mechanism can absorb a deficit of this scale for long, according to a research briefing (pdf) by Oxford Economics.

The price signal is working on demand — just weakly: Short-run oil demand is barely responsive to price, with elasticity around -0.03 — meaning a 1% rise in prices cuts demand by just 0.03%. Even with Brent up 79%, that only trims global demand by roughly 2.4 mn bbl / d in 2Q. It helps at the margin, but leaves most of the shock unabsorbed, with around 10 mn bbl / d still missing from supply since the war began.

The adjustment is hitting the margins, not the core: Higher prices are mostly cutting discretionary use, not essential demand. That keeps the system running, but it doesn’t solve the underlying mismatch between supply and demand.

The constraint shifts from crude to products

The strain is more acute in refined products: “I think refining bottlenecks are the biggest constraint. Strategic reserves and inventory drawdowns are offsetting supply loss, but those buffers are being depleted. Refineries have already cut run rates, particularly those who process heavier Middle Eastern grades,” Bridget Payne, head of oil and gas forecasting at Oxford Economics, tells EnterpriseAM.

Diesel is the pressure point: Freight, agriculture, construction, rail, and industry all depend on it, with few near-term substitutes. Demand here barely responds to price, which is exactly why shortages hit harder. “Emerging economies that are the most price-sensitive are likely to be the hardest hit,“ Payne told us.

Jet fuel is one of the few release valves: Air travel is more discretionary, and fuel costs quickly pass into ticket prices, lowering demand. Aviation absorbs some of the shock early, but it’s too small a share of total demand to rebalance the system on its own.

Shipping doesn’t really adjust, it just slows down: Bunker fuel demand is highly inelastic, with operators cutting speed rather than eliminating consumption — which preserves demand, but reduces effective transport capacity. For Egypt, this is a double-edged sword: slower transit speeds directly threaten Suez Canal throughput and revenue as global shipping cycles lengthen.

Safe… for a while: “For now, households and ordinary businesses are partly protected because airlines, utilities, and suppliers locked in prices earlier through contracts. It does not help if physical shortages start to appear, and once those contracts expire, the pain will become much more visible,” Payne added. In markets like Egypt and Jordan, that visible pain hits national budgets and subsidy programs long before it reaches the pump.

Running out of buffers

Inventories are buying time, not solving the problem: Countries have been drawing down crude and refined stocks to maintain supply, delaying visible shortages. That’s why the adjustment has so far been economic — through prices — rather than physical. But this is a temporary buffer.

Even the headline inventory numbers overstate the cushion: The IEA pegs global observed stocks at over 8.2 bn bbl — but not all of that is accessible, with operational minimums, refining constraints, and logistics all limiting what can actually reach the market. The 400 mn bbl release helps, but in flow terms adds only around 2-3 mn bbl / d.

There are also wrong barrels in the wrong form: Middle Eastern crude is heavier and better suited for diesel and jet fuel, while strategic releases include lighter grades. So even when crude is available, the products that matter most remain tight. “There is some flexibility, but not enough to fully make up the difference quickly,” Payne said.

What’s next

What’s left is the gap: After price and inventories do their part, some 2 mn bbl / d of demand still won’t be covered. The gap widens the longer the disruption lasts, as inventories drain and price loses effectiveness. “That gap is made up of rationing and shortages,” Payne told us.

In a prolonged war scenario, rationing becomes systemic — and the macro breaks. If disruption extends through September and expands to the Red Sea, pipelines, and production facilities in the Gulf, demand would need to be rationed. Oxford Economics estimates that such a scenario would push the global economy into a recession, with GDP growth slowing to 1.4%.

Rationing means fuel is no longer allocated by price, but by restriction. Instead of buyers getting what they can afford, access is capped through quotas, priority allocation, or outright shortages.

Even without further supply losses, we’re getting close: “Right now, the shortfall is around 2% of global oil demand, equivalent to a modest reduction in road transport and fewer flights. By June, I estimate that it will rise to 7.5% of global oil demand, more than the total oil consumption of India,” Payne noted.

The system is absorbing the shock through two buffers — price spikes and inventories — which are limited. If the war drags on, we move into a third stage of physical shortage and rationing, which is much nastier since it directly hits real economic activity. Trucks won’t move, machinery won’t run, construction slows, factories lose output, and shipping capacity tightens.

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