THE Strait of Hormuz The oil shock has not yet caused demand to fall as the rich world borrows against its stocks and pays to guarantee its supply. Traders are now sounding the alarm: a brutal adjustment is coming.
The longer the vital oil channel reopens, traders say, the more consumption will have to recalibrate downward to align with supply that has fallen by at least 10%. And for that to happen, people will have to buy less, either through prices they can’t afford or through government intervention to drive down consumption.
A supply loss of a billion barrels is already virtually guaranteed – more than double the emergency stocks that governments released shortly after the conflict began in late February. Reserves are depleting quickly, which is helping to keep oil prices in check for now. But with the shutdown now in its ninth week, the demand destruction that began in less obvious sectors like petrochemicals in Asia, is quietly spreading to daily markets around the world.
“Demand destruction is happening in places that are not visible pricing centers,” Saad Rahim, chief economist at trader Trafigura Group, said at the FT Commodities Global Summit in Lausanne this week. “This adjustment is already happening, but if it continues, it will have to become bigger and bigger. We are at a critical inflection point.”
The most dependent industries and markets – including petrochemical plants in Asia and the Middle East and shipments of liquefied petroleum gas, a vital cooking fuel in India – were immediately hit when the United States and Israel first attacked Iran on February 28.
Today, as the standoff between U.S. President Donald Trump and his Iranian adversaries drags on, the impact is shifting increasingly westward — and toward the products that are central to consumers’ daily lives. European and American airlines are canceling thousands of flights.
Analysts warn of weakness in gasoline consumption after prices hit $4 a gallon in the United States, and diesel, used to power everything from trucks to construction equipment. Global oil demand is on course for its biggest decline in five years this month, according to the International Energy Agency, which has coordinated emergency measures by major economies to counter the supply shock.
Trading giant Gunvor Group estimates the loss could double next month to 5 million barrels a day, or 5% of global supplies, and, like other major traders, sees a growing risk of economic recession. Other analysts say the impact has already reached around 4 million per day.
This assessment is starting to take shape. Germany cut its economic growth forecast in half, while the International Monetary Fund cut its global estimates, citing war.
In the most “severe” of the three scenarios modeled by the European Central Bank, Brent prices peak at $145 per barrel and halve the region’s growth. The need for a downward adjustment in oil demand and economic activity, likely through prices that discourage consumption, will only increase as the strait remains closed.
Global demand is already facing a decline of 5.3 million barrels per day this quarter, and a 12-week disruption in the Hormuz price would push Dated Brent, the world’s main physical crude price, above this month’s record high of $154 per barrel, according to FGE consultant NexantECA.
“As there is still no visible disaster” in the west, “people think that everything is fine and that the only impact is a slight increase in prices at the pump,” said Cuneyt Kazokoglu, director of energy transition at FGE. But demand destruction “will come and happen in waves. Asia was first in line, Africa comes next. Europe has already started talking about the shortage of certain fuels and feeling the impact on prices.”
Ultimately, in a market where demand must adjust downward to meet lower supply, oil prices could be the driving force behind this recalibration. In extreme scenarios, where price alone forces the market to balance, FGE estimates that crude oil should rise to $250 per barrel.
Several analysts said privately that the extreme uncertainty over the outcome of the conflict made modeling the impact on demand almost impossible. But without a quick solution, the economic consequences could be profound.
