PTQ Q3 2026 Issue

Expectations inuence production & runs

Flow adjustment

Inventory channel

Market outcomes

Futures curves & spreads Spot prices & volatility R efining margins & runs Observed crude demand

Stock builds / draws Strategic releases & rells

Production changes Consumption shifts Trade ows

Initial imbalance

Signal transmission

Inventories absorb, delay or amplify ow imbalances Commercial storage decisions Inventory transparency / opacity

Physical supply-demand changes

Observable market response

The same ow imbalance can generate very dierent price outcomes depending on inventory conditions

Figure 2 Inventory channel as a transmission mechanism, linking supply-demand imbalances to prices and observed demand

to function as quasi-strategic buffers, and aligns inventory decisions with broader industrial and geopolitical objectives. For external observers, this opacity complicates real-time demand assessment. Stockpiling absorbs barrels that would otherwise contrib- ute to global surpluses. Accelerated accumulation tightens spot availability, supports exports from producing regions, and sustains arbitrage flows. When stockpiling slows or reverses, barrels re-enter the market, softening balances even if underlying consumption remains stable. These effects operate with a time lag, meaning markets often recognise them only after the adjustment has occurred. China’s inventory behaviour is closely linked to refining operations, maintenance cycles, capacity additions, slate optimisation, and export quotas. During refinery expansion, inventory accumulation enables smooth ramp-ups with- out immediate price reaction. In the case of weak margins, inventory flexibility facilitates gradual throughput adjust - ments instead of abrupt demand destruction. This stabilises crude demand but delays global price responses. Opacity, trade flows, and demand signal distortion Limited transparency amplifies China’s market impact. Unlike weekly US reports, Chinese stock changes are inferred through imports, runs, port congestion, and stor- age estimates. This delayed visibility is central to the real- ised balance channel. Additionally, stockpiling can absorb surplus barrels, support exports, and stabilise trade flows. Thus, when accumulation reverses, surplus barrels re-emerge, pressuring prices and disrupting routes. These shifts are recognised only after flows adjust, in which price movements often appear disconnected from contempora- neous fundamentals (see Figure 4 ).

Modern oil markets increasingly depend on inventories as active drivers of price and demand signals. Yet outside the US, inventory data remain uneven and delayed, creating a persistent information gap. This delayed signal transmission leads to systematic misinterpretation. Import volumes are often treated as proxies for consumption, even when they reflect stockpiling or drawdowns. As a result, prices may move first, while explanations follow later. Opacity does not merely obscure information; it reshapes how markets learn. Final transmission mechanism Strategic stocks outline expectations and realised balances at the crude level, but refining and product markets ulti - mately determine translation of these dynamics into actual crude oil demand. Since refineries are the critical interface between upstream supply and end-user consumption, refining economics acts as the final transmission mecha - nism of the inventory channel. Their responses are not only associated with crude balances alone, but also with prod- uct inventories, crack spreads, storage constraints, export opportunities, and regulatory conditions. Elevated product stocks compress margins and limit runs, even in otherwise tight crude markets, while the tight prod- uct markets have the opposite effect. Their tightness sup- ports margins and encourages higher throughput, amplifying crude demand without any upstream policy change. Thus, refining economics in these aspects is the final gatekeeper of the inventory channel and the crucial incentivising factor of the crude oil demand (see Figure 5 ). Refinery feedback loops Product inventories have become the market’s early warning system. Rising stocks compress crack spreads and reduce

SPR policy signal

Front-month price curve level Futures curve reprising

Backwardation contango, M1–M2 Time spreads adjustment

Volatility response

Renery margins impact

Signals future availability

Reprices prompt structure

Alters scarcity premium

Changes run economics

Risk premium, uncertainty compression or expansion

Crack spreads, run incentives

SPR release/rell announcement guidance

Figure 3 How the US Strategic Petroleum Reserve impacts oil markets primarily through expectations rather than physical volumes. M1–M2 refer to market maturities on the futures curve; M1 is the first (front-month) futures contract, and M2 is the second-month futures contract

PTQ Q3 2026