How Will U.S. Inventory Surges and Red Sea Tensions Shape Oil Markets in Q3?

U.S. commercial crude oil inventories rose by 7.1 million barrels last week, marking the second consecutive weekly build and sharply defying analyst expectations for a drawdown. At 426 million barrels, stocks remain about 8% below the five-year average, but the surprise increase signals weaker demand or stronger supply as the summer driving season peaks.

Crude imports fell, while exports rose, and refinery runs slipped slightly, reflecting a complex supply-demand picture. Gasoline demand, however, surged to 9.2 million barrels per day, pushing gasoline stocks lower and underscoring robust seasonal consumption.

This inventory build, combined with high refinery utilization near 95%, has tempered bullish sentiment and raised fresh questions about the sustainability of any price rally.

Red Sea Tensions Inject Geopolitical Risk Premiums

Attacks on commercial vessels in the Red Sea by Houthi militants have reignited geopolitical risk premiums in global oil markets. The recent sinking of two cargo ships, with tragic loss of life, has heightened concerns over the security of vital shipping lanes linking the Middle East to global markets.

These disruptions threaten to constrain supply routes and increase transport costs, supporting oil prices even as fundamentals point to a surplus. Traders remain alert to further escalation, as any sustained threat to Red Sea transit could ripple through global supply chains and amplify price volatility.

Market participants are closely monitoring the situation, balancing the immediate impact of security risks against broader inventory and supply trends.

Did you know?
The Red Sea handles nearly 10% of global seaborne oil trade, making it one of the most strategically important maritime corridors. Disruptions here have historically led to significant price swings and policy responses worldwide.

Global Oil Inventories and Production Growth Exert Downward Pressure

Despite geopolitical risks, the underlying trend remains bearish due to persistent global inventory builds. The U.S. Energy Information Administration forecasts global oil inventories to grow by an average of 0.8 million barrels per day in 2025, driven by robust supply growth from both OPEC+ and non-OPEC producers.

Lower-than-expected demand growth, especially in OECD countries, and a rollback of OPEC+ production cuts are contributing to the surplus. Brent crude prices have fallen steadily, with the EIA projecting an average of $66 per barrel for the remainder of 2025 and $59 for 2026, while WTI is expected to average $62 in 2025 and $56 in 2026.

The persistent inventory overhang is likely to cap any sustained price rally, even as geopolitical events periodically lift risk premiums.

ALSO READ | Will Geopolitical Tensions Override OPEC+ Supply Moves in Oil Markets?

Market Caught Between Security Fears and Supply Surplus

Oil traders face a tug-of-war between the bullish impact of Red Sea security threats and the bearish weight of rising inventories. While safe-haven buying may offer short-term support, the broader trend of global supply outpacing demand is expected to keep prices in check.

Technical levels for WTI and Brent are closely watched, with recent settlements reflecting this delicate balance. Analysts caution that unless demand growth surprises to the upside or supply is disrupted more severely, downward price pressure may persist through Q3.

Refinery utilization and gasoline demand remain key variables, as strong summer consumption could temporarily tighten balances, but the overarching surplus is unlikely to dissipate quickly.

Q3 Outlook: Volatility Likely as Risks Persist

Looking ahead, oil markets are set for a volatile third quarter. The interplay between U.S. inventory trends, Red Sea security developments, and global supply growth will drive price action. Any escalation in shipping attacks could trigger sharp price spikes, while persistent inventory builds may limit gains.

The next EIA reports, OPEC+ policy signals, and real-time shipping security updates will be critical for market direction. Traders and policymakers will need to navigate a landscape shaped by both structural oversupply and unpredictable geopolitical shocks.