A Fearless New Oil Market Requires a Rethink

Oil storage tanks at a petrochemical production base on the outskirts of Shanghai. (Bloomberg)

About the author: Antoine Halff is chief analyst at Kayrros, a firm that uses satellite data and AI to monitor oil activity. He was formerly the chief analyst at the International Energy Agency.

The oil market is defying conventional logic. Though global supply exceeds demand by a wide margin, prices refuse to collapse. They have fallen, as you might expect. But they haven’t sunk as low as the level of oversupply would suggest.

In the U.S., oil inventory at the Cushing Oil Hub, a critical oil shipping nexus located in Oklahoma, remains stubbornly low, yet local prices aren’t surging in the way they once did. Geopolitical shocks that used to send the market into a tailspin now come and go, almost unnoticed. Something fundamental has changed.

Two big forces are behind this shift, and both point to a structural evolution in how the oil market works.

First, China has turned itself into the world’s oil shock absorber. China has increased its oil imports and stockpiles as its economy has ascended over the past two decades. What is new is that the explosive growth of storage capacity continues unabated, even as the underlying economy has slowed down. The relentless expansion of storage infrastructure now far outpaces both China’s domestic oil consumption and inventory builds.

Since early 2020, Chinese crude stocks have surged to record highs, but its storage capacity has grown even more so. By September this year, China’s oil inventories stood almost 10% above their Covid-era peak in 2020. Even so, its inventory as a percentage of capacity has fallen 15% over the same period. This project of expansion shows no sign of ending soon. It may even accelerate in 2026.

The numbers from this year alone are eye-opening. Between early February and early September, China added roughly 160 million barrels to its stocks of crude. That amounts to some 800,000 barrels a day on average for more than six months. That single build accounted for around 90% of the entire global stock increase.

The result is that China now has massive inventories and even greater spare storage capacity. It can keep soaking up surplus supply and put a floor under prices. Or it can reverse course, draw down reserves, and push prices lower. In the coming months, the direction of the oil market will depend largely on which Beijing chooses to do.

The second big change in the oil market relates to transparency. Historically, the oil market has been opaque. Chinese oil stocks and storage capacity went through major growth spurts at the turn of the century, and then again after the global financial crisis of 2008-09. But the rest of the world could see little of the changes happening in China’s oil market. It has now become almost completely visible. Satellite imagery, cargo tracking, and other near real-time forms of geospatial data allow traders to see oil movements and make adjustments before those changes turn into shocks. Volatility no longer catches the market by surprise as it once did; it gets priced in ahead of time.

The Yemeni Houthi’s drone attacks in 2019 on Saudi Arabia’s Abqaiq processing complex, the largest such facility in the world, makes for an interesting case study. Satellites revealed the extent of the damage within hours, tracked the repair crews at work in real time, and instantly identified replacement barrels. It is true that prices spiked, but only very briefly. More recently, missile strikes exchanged between Iran and Israel barely moved the market. Imagery showed right away that Israeli missiles hit Iranian domestic gas infrastructure, not oil export facilities, and so traders stayed calm. They could see with their own satellite-enhanced eyes that the impact was limited.

These forces have sharpened the market’s reflexes. Pipeline bombings, tanker seizures, and flare-ups in the Middle East no longer trigger panic buying or fears of lasting shortages. Supplies reroute quickly, with near-surgical precision. Spare production capacity, while it may not be larger than before, looks more comfortable in an energy system that has become more efficient. Disruptions, in short, are short-lived. Fear has almost vanished.

For traders, the implications of all of this are clear to see. Big volatility trades have become rarer and less profitable. There is no more easy money to be made by placing huge bets on headline-driven swings. The opportunities are now elsewhere: in regional arbitrage, in patient structural bets, in logistical proficiency that lets physical traders react promptly to price signals, and in the prompt exploitation of the small but persistent price differences that new data makes visible every day.

Governments may have a harder time adjusting. Energy-security policies that were developed on the assumption that disruptions would automatically mean price spikes and potential shortages are no longer up-to-date. Sanctions still hurt the targeted country, but they no longer frighten the market, especially if loosely enforced. Importers find a new source of oil, and sanctioned exporters find a new home for their oil. Strategic petroleum reserves designed to calm markets after a major supply shock may remain unused because the market calms and readjusts on its own.

Policymakers must rethink some things. They must reconsider the size, location, composition, and release mechanisms of their emergency stocks. They must question the efficacy of sanctions in a world where trade adjusts more quickly than diplomats can write with new rules. And they must scrutinize their very definition of energy security in an age when physical oil shortages rarely materialize. Risks are migrating to electricity and renewable fuels faced with new vulnerabilities, such as intermittency and grid-integration challenges.

This doesn’t mean the oil market is safe or settled. The oil market has become more transparent, but that isn’t to say it has become predictable. New threats, such as extreme weather, tariffs, economic warfare, disruptive technological leaps, and the fraying of the postwar order, can defeat traditional forecasting models trained on historical data. But there isn’t yet such a thing as a crystal ball.

But what we do have is technology that allows us to see things as they are, at this moment, and so a market that was once opaque now operates in plain sight. That single change has rewritten the rules of pricing, trading, and energy security itself.

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