Oil Reserves Are Shrinking, but Demand Drops Faster Than Attacks Disrupt Supply

A Hawk in Trump’s Cage

An important factor is the political pressure. Donald Trump recently reiterated that the Fed should keep rates significantly lower, thereby also helping the US government. According to him, every percentage point in interest rates costs the United States approximately $650 billion, and US rates should be somewhere between 0.5% and 1%. “We shouldn’t be at four percent,” he stated in early September.

The new head of the US Federal Reserve, Kevin Warsh, was appointed to replace the indecisive Jerome Powell – whom Trump called “Mr. Too Late” – precisely to lower interest rates. But no one anticipated that the war with Iran would last this long or that energy prices would remain so high.

The latest US inflation data for August, released on Friday 11 September, highlighted this very problem. Consumer prices rose 0.4% month on month, compared with just 0.1% in July. Year-on-year inflation remained at 3.4%. Although core inflation slowed year on year from 2.5% to 2.4%, it rose 0.3% month on month, exceeding the expected 0.2%. Based on these data, markets became convinced that a rate hike was inevitable.

The problem, however, is that Warsh is increasingly positioning himself as a hawk who views tackling inflation as a top priority. His view is very close to that of Milton Friedman, who regarded inflation as a monetary phenomenon – in other words, monetary policy is primarily responsible for inflation.

The central bank can therefore bring inflation below its 2% target through radical measures. Warsh remains very hawkish in his rhetoric, but so far there has been little action to match it. In all his speeches, he has been extremely careful not to signal any moves in advance or suggest anything that could be taken as a commitment. At the September meeting, however, he will no longer be able to avoid a decision, and it will be largely up to him whether rates rise.

The situation is particularly interesting because the vote is expected to be very close. Of the 12 members, six are expected to vote for a rate hike and six to keep rates steady. If the vote were to split exactly six to six, a rate hike would lack the necessary majority and rates would remain unchanged.

Warsh would therefore have to convince at least one opponent of a rate hike to secure a majority of seven votes. If that happens and rates go up, the Fed chair will bear the brunt of the blame. Everyone will then be watching closely to see how the White House reacts. Warsh risks having an even more difficult tenure than Powell.

And it does not end there. Everyone realizes that a single 25-basis-point rate hike solves nothing. What happens next will be more important. Trump is already admitting that he does not expect the crisis to end until after the November elections at the earliest. Given how flexible his administration has been when it comes to pushing back deadlines, the conflict is likely to last longer.

The War Is Finding New Paths

The conflict has now spread to another strategically important area. On 10 September, the Houthis took control of the Yemeni port city of Mocha, approximately 80 km from the Bab el-Mandeb Strait. They subsequently occupied the island of Mayun, directly in the strait, and are now advancing toward other islands in the Red Sea. Their position along one of the world’s most important maritime routes has thus been significantly strengthened.

At the same time, another problem has arisen for Saudi Arabia. On 10 September, its East-West oil pipeline was attacked by drones at several locations in the Riyadh and Medina regions. Saudi authorities claim that the drones came from Iraq. The pipeline was subsequently shut down as a precaution, and technical teams are now assessing the extent of the damage.

No one knows exactly how long it will be out of service. The Saudi government has not announced a date for resuming operations. Estimates range from a few days to six weeks, depending on the extent of the damage. Satellite images show serious damage to at least one facility along the pipeline route.

High Oil Prices Cure High Oil Prices

Oil prices were expected to surge after the weekend, but fortunately, that did not happen. They did rise, but only very slightly. Brent reached $107 per barrel, a daily gain of 0.43%. So, no disaster. As a reminder, developments this spring showed us that the pain threshold for the Trump administration is somewhere around $130 per barrel. There is therefore still a relatively significant margin. So why was the price increase so modest?

The answer lies in the International Energy Agency’s latest projection. Last week, the agency significantly lowered its estimate for global oil demand. Global demand is now expected to fall by 2.5 million barrels per day in 2026. Just a month earlier, the agency had expected a decline of only 1.6 million barrels per day.

The forecast has thus worsened by an additional 940,000 barrels per day in just one month. This is a classic case of demand destruction caused by high prices. While the markets have calmed down, this is bad news for the global economy. Lower demand for oil also means slower economic growth.

The report also highlighted declining global oil reserves, which could become a problem in the future. The main reason oil prices did not soar after the attacks began in the spring of 2026 – and why they have remained in check since – is that economically powerful countries are drawing down their reserves. But those reserves are not infinite. In this conflict, time works particularly in Iran’s favor.