AFS Markets Blog: Midday 17/09/2026

• Meanwhile in markets, the Middle East is obviously the center of attention for energy prices, but don’t lose sight of what’s happening elsewhere. Crude prices may be down three percent this week, but the major strategic crude reserve drawdowns that helped cushion the supply shock are now coming to a standstill;

• Releases from the US Strategic Petroleum Reserve essentially came to a standstill in the weeks leading up to last Friday. Since late March, more than 130 million barrels of crude have steadily been pulled from their underground salt caverns – depleting roughly half of the US reserve’s extractable inventory in five months’ time. Over in China, overall inventories grew in August according to the IEA – although exact numbers are hard to come by;

• In part, the slowing of reserve drawdowns probably reflects nations keeping powder dry for future shocks – but it also underscores a new reality on the ground. The primary bottleneck driving pump prices higher is not a shortage of crude, but one of global refining capacity;

• Crack spreads reveal the extent of this shortage. The 3-2-1 spread – measuring the margin of refining three barrels of crude into two barrels of petrol and one barrel of diesel – has surged nearly 250 percent in 2026. Compare that with Brent crude, which advanced a comparatively modest 75 percent;

• A combination of factors are currently driving crack spreads. While crude exports from the Middle East have recovered to sixty percent of pre-war levels, exports of refined products sit at just forty percent of their pre-war level according to the IEA. The lack of diesel exports is especially glaring – volumes are at only a quarter of pre-war levels. With diesel unable to get out of the Strait prices have skyrocketed: European diesel futures are up 130 percent YTD – nearly double crude’s gain;

• Another war is also driving the move in diesel: that between Russia and Ukraine. Together, Russia and the Middle East accounted for 45 percent of global seaborne diesel exports in February. Russia has since banned diesel exports following Ukrainian strikes on refineries, with reports suggesting the ban could be extended through the end of the year. There is a bright spot though: President Trump stated this week that he had secured a ceasefire on attacks against energy infrastructure in Ukraine and Russia. However, while both sides say they are receptive to the plan neither appears willing to stop yet. Just this morning Zelenskiy confirmed a strike on Russia’s Yaroslavl refinery – one of the largest in the country;

• Elsewhere, refineries have stepped up production in the face of widening crack spreads – showing the rise is not just a simple case of greedflation. In the US, refinery utilization has been running at multi-year highs of around 97 percent since June. However, US refineries running overtime is not a permanent solution. They are reportedly postponing regular maintenance which risks breakdowns – which would put further pressure on diesel and other refined product prices. Can China’s spare refining capacity save the market? Not necessarily, as they would have to return to the crude market, driving up prices there. So unless crude supply picks up that would merely shift the bottleneck;

• Shifting to some broader market commentary, US Treasury yields are down 3bps across the curve this morning, with the 10-year UST yield reversing half of its gains following yesterday’s hawkish FOMC meeting. In our neck of the woods, the 2-year Bund yield is up 4bps this morning, while the long end of the curve is holding steady. The French OAT-Bund spread sits at its post-Eurozone-crisis high of 97bps, as Marine Le Pen – the frontrunner in 2027 presidential polling – said she is open to a vote of no confidence over the 2027 budget – though even she admitted not wanting to damage the country’s finances;

• Over in equities, the Stoxx 50 is up over half a percent this morning, with S&P 500 futures up more than three-quarters of a percent. In FX, the broad dollar has given up roughly a third of its gains since yesterday’s FOMC, with USDJPY trading back in the 155 handle. European natural gas prices are down 5 percent over the past week, but that barely dents their 20 percent month-to-date gain;

• Looking ahead, the afternoon brings both the interest rate decision of the Bank of England and the Czech National Bank – with both expected to hold rates. For the Old Lady of Threadneedle Street we’re keeping a close eye on the vote count, to see if there are still only three dissenters calling for a 25bps hike like in July. Tomorrow all eyes will be on the Bank of Japan, which is set to hike rates by 25bps.

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