The longer the vital oil channel doesn’t reopen, traders say, the more consumption is going to have to recalibrate lower to align with supply that’s dropped at least 10%. And for that to happen, people will have to buy less, either through prices they can’t afford, or government intervention to force consumption down.
A billion barrels of supply loss is already all-but guaranteed – more than double the emergency inventories that governments released not long after the conflict began at the end of February. Buffers are being used up fast, helping to keep a lid on oil prices for now. But with the closure now in its ninth week, demand destruction that started in less obvious sectors like petrochemicals in Asia, is quietly spreading to everyday markets the world over.
“Demand destruction is happening in places that are not visible pricing centers,” Saad Rahim, chief economist of trader Trafigura Group, told the FT Commodities Global Summit in Lausanne this week. “That adjustment is already happening, but if this continues, it has to get larger and larger. We’re at a critical inflection point.”
The most dependent industries and markets – including petrochemicals plants in Asia and the Middle East, and shipments of liquefied petroleum gas, a vital cooking fuel in India – saw an immediate hit when the US and Israel first attacked Iran on February 28.
Now, with a stalemate between US President Donald Trump and his Iranian adversaries dragging on, the impact is increasingly shifting west – and to products that are central to consumers’ everyday lives. Airlines in Europe and the US are cutting thousands of flights.Analysts are warning of weakness in consumption of gasoline after prices hit $4 a gallon in the US, and diesel – used to power everything from trucks to construction equipment. Global oil demand is on track to slump the most in five years this month, according to the International Energy Agency, which coordinated the emergency measures by major economies to counteract the supply shock.
Trading giant Gunvor Group estimates the loss could double next month to 5 million barrels a day, or 5% of world supplies, and along with other major traders sees a growing risk of economic recession. Other analysts say that the impact has already reached around the 4 million a day mark.
That toll is beginning to take shape. Germany has slashed economic growth forecasts in half, while the International Monetary Fund has trimmed global estimates, citing the war.
In the most “severe” of three scenarios modelled by the European Central Bank, Brent prices peak at $145 a barrel and cut the region’s growth in half. The need for oil demand and economic activity to adjust lower, most likely through prices that discourage consumption, will only increase with every day the strait stays shut.
Worldwide demand already faces a hit of 5.3 million barrels a day this quarter, and a 12-week disruption of Hormuz would propel Dated Brent, the world’s key physical crude price, above this month’s record to $154 a barrel, according to consultant FGE NexantECA.
“Because there is still no visible disaster” in the west, “people think everything is okay, and a bit higher pump prices are the only impact,” said Cuneyt Kazokoglu, FGE’s director of energy transition. But demand destruction “will come and is coming in waves. Asia was first in line, Africa is the next one. Europe has already started talking about the lack of some fuels and feeling the price impact.”
Ultimately, in a market where demand needs to adjust down to match lower supply, oil prices may be what drive that recalibration. In extreme scenarios, where price alone forces the market to balance, FGE estimates that crude oil would need to surge to $250 a barrel.
Several analysts said privately that extreme uncertainty about what will happen in the conflict makes it almost impossible to model the demand impact. But without a swift resolution, the economic consequences could be profound.
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