AFS Markets Blog: Midday 23/07/2026

• Meanwhile in markets, Brent crude continues its slow march toward the big one-zero-zero dollar mark this morning. Bonds are responding by hitting war highs, with the 10-year Bund yield rising above 3.20 percent – its highest level since 2011;

• The latest woes on the oil – and bond – market aren't just about the Strait of Hormuz, the Red Sea has entered the picture too. The Houthis in Yemen announced they had struck two oil tankers there off the Saudi coast. With the Gulf already cut off, the Houthis – part of Iran's Axis of Resistance – now risk cutting off Red Sea traffic and access to the Suez Canal too – something they already did in late 2023/early 2024;

• The latest reports show Oman is scrambling to resume diplomacy between the Houthis and the Saudis – diplomacy that seems to have collapsed. Saudi Arabia has long been at odds with the Houthis and bombed an airport in Yemen just over a week ago;

• Touching upon markets, Bund yields are up 2–5bps this morning in a bear-flattening move – with yields across the curve at or near their highs since the war in Iran began. US Treasury yields are seeing a more modest move – rising around 2bps – though they too are trading at or near their highs of the war;

• At the time of writing Brent crude is trading at $98.66 per barrel. Considering that the Strait of Hormuz has endured five months of (intermittent) disruptions – current prices remain surprisingly contained by historical standards. Even the conflict’s peak crude price of $126.41 per barrel falls short of records – despite the severe shock to logistics. I want to spend some time diving into the factors that have helped cushion the blow;

• The world has offset the decline in crude supplies through several channels. According to the IEA, nearly half of the drop in Gulf crude production has been absorbed through lower end-usage – demand destruction. Other factors, including releases from strategic crude reserves and – to a lesser extent – higher crude production elsewhere (primarily in the Americas) have also helped ease pressure on markets;

• The status of strategic reserves deserves close attention. If these emergency buffers run low, buyers who depend on them will have no choice but to return to the open market. That sudden influx of demand will drive crude prices even higher and ultimately will lead to more painful demand destruction that is needed to offset the decline in crude supply;

• First, let's look at China. Exact figures on China's reserves aren't widely shared, but US estimates put the total at just under 1.4 billion barrels – by far the largest strategic crude reserve in the world. China's drawdown of reserves – combined with a real drop in end-user demand – has allowed the country to slash crude imports by 40 percent since March – some 4.6 million barrels per day. That equates to roughly a third of the global shortfall from halted Gulf production;

• Tapping around 41 million barrels from crude reserves in June, China holds about two-and-a-half years of reserves at its current burn rate. However, there is little reason to mark that date in your calendar – a prolonged closure to the Strait of Hormuz will see demand and imports shifting significantly;

• Shifting to the world’s second-largest reserve holder: the US of A. The most well-known buffer is the Strategic Petroleum Reserve – the government-owned stockpile of crude oil (not refined petrol). Sitting just under 420 million barrels at the outbreak of the war, over 25 percent of the stockpile has been drawn down over the last four months;

• You might think that leaves the US with a year of reserves at current rates – but that's misleading. All strategic reserve figures – including the aforementioned in China – come with a bit of optimism baked in: not every barrel on paper is actually accessible. Take the SPR, which is stored in caves in Texas and Louisiana. Factors like cave stability and pumping limitations mean the operational floor sits at roughly 150 million barrels – not zero. At current drawdown rates, that leaves closer to six months of reserves – not twelve. The bottom is closer than it looks and I’m sure Iran is aware of this;

• US commercial parties also hold another 400 million barrels of crude inventory, spread across storage terminals, refineries and pipelines. Here too there is a thing called tank bottom since storage tanks and pipelines need a minimum operational level of crude to function. Where exactly that floor sits – the point where drawdowns become impossible or inventories are just too and trigger demand destruction – is unclear;

• Shifting back to markets, the Stoxx 50 is down more than three-quarters of a percent this morning, while S&P 500 futures are down by just under half a percent. In FX, the broad dollar is trading marginally lower;

• Looking ahead, all eyes are on the ECB rate decision at 14:15 CET. The consensus is that rates will be held steady, with a hawkish undertone at the presser to set up a 25bps hike in September. Don't forget, we also have the obligatory weekly US jobless claims lined up.

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