Oil inventories hit 11-year low as Middle East conflict roils markets

The monthslong closure of the Strait of Hormuz has pushed global oil inventories to an 11-year low, widening the price gap between regions exposed to the disruption and those with domestic supply.

The Strait of Hormuz closure has pushed global oil inventories to an 11-year low, widening the price gap between import-dependent regions and those with domestic supply. California drivers now pay $6.15 a gallon for regular gasoline, more than 50 percent above the $4 a gallon in Texas, where refineries draw from local crude.

"The average retail price in Texas right now is $4 a gallon for regular. In California it's $6.15 — quite a bit higher," said Debnil Chowdhury, an analyst at S&P Global Energy. "With the shutdown of two of the major refineries in California, they're more dependent on imports."

The divergence reflects structural differences in energy policy and infrastructure. California uses a specialized gasoline blend with stricter environmental requirements and has seen two major refineries shut down, increasing its reliance on imports from Asia that pass through the Strait of Hormuz. Texas, by contrast, produces oil at all-time highs and benefits from the strongest refining capacity in the country, according to the Energy Information Administration. In the UK, Ofgem's price cap will rise 13 percent from July 1, pushing the typical household's annual energy cost to 1,862 pounds, as higher wholesale gas prices feed through to consumers. Gas bills alone will increase 24 percent, while electricity costs rise 5 percent.

The inventory drain raises the stakes for any further escalation. With global supply tight and replacement capacity limited, even a partial reopening of the Strait of Hormuz would leave the market vulnerable to price spikes for months, analysts said. Cornwall Insight forecasts the UK price cap will remain at similar levels in October even if the conflict ends soon, because of physical damage to infrastructure and lingering supply disruption. The longer the disruption persists, the more exposed are consumers in regions that have bet on imported energy while transitioning away from domestic production.

The $2.15 Gallon Gap

The price disparity between California and Texas illustrates how the conflict worsens existing regional vulnerabilities. California's pump price of $6.15 reflects not just higher state taxes and its specialized fuel formula, but also the logistics cost of importing gasoline from Asian refineries that rely on crude transiting the Strait of Hormuz. Texas gasoline at the pump in Houston likely originated from a refinery 15 to 20 miles away, Chowdhury said.

Chevron, once the Standard Oil Company of California, purchased its Pasadena, Texas, refinery in 2019 and announced in 2024 it would move its headquarters from California to Texas, citing a more favorable business environment on the Gulf Coast. The company's director of Gulf Coast Refining, Tim Potter, said California's progressive policies had created "a much more difficult business environment to operate in."

Drillers and Midstream Operators Gain

The inventory crunch is creating a more favorable backdrop for oilfield service companies. Patterson-UTI Energy, which operates 137 Tier-1 super-spec rigs and has a market capitalization of $4.7 billion, has seen its stock surge 116 percent over the past year. Nabors Industries, operating in more than 20 countries with a market cap of $1.6 billion, has gained 304 percent. Helmerich & Payne, with more than 200 land rigs and a $4 billion market cap, has risen 164.8 percent. The Zacks Oil and Gas - Drilling industry has climbed 117.8 percent over 12 months, compared with a 30.3 percent gain for the S&P 500.

For investors seeking exposure without direct oil price risk, midstream operators offer an alternative. Enterprise Products Partners and Enbridge, which charge fees for moving oil and gas through pipelines, have increased their dividends annually for decades and offer yields of 5.5 percent and 4.8 percent, respectively. Their cash flows depend on demand for oil, not its price, insulating them from the volatility driven by headlines from the Middle East.

This article is for informational purposes only and does not constitute investment advice.