The longer the Strait of Hormuz remains shut, the more consumption cuts will be necessary. This will force people to either procure less fuel or afford prices they currently cannot sustain, or through obligatory demand reduction.
The oil crisis in the Strait of Hormuz has not yet triggered a sharp drop in fuel demand, but traders caution that this is imminent if the situation persists, according to Bloomberg.
Experts suggest that the duration of the Strait of Hormuz closure directly correlates with the extent to which nations must reduce fuel consumption to align with supply, which has diminished by at least 10%.
A guaranteed loss of one billion barrels of oil is anticipated—a figure more than double the emergency reserves governments released shortly after the Middle East conflict began in late February, Bloomberg notes.
Nations are tapping into oil stockpiles, which is currently helping to temper price surges. However, with the strait blockade now nearing its ninth week, demand contraction is starting to permeate markets across the globe.
“Demand destruction is happening in places that are not the obvious pricing hubs,” Saad Rahim, Chief Economist at Trafigura Group, commented at the FT Commodities Global Summit in Lausanne. He warned that markets are at a “critical breaking point.”
A trader from Gunvor Group forecasts that oil losses will double next month, reaching 5 million barrels per day, equivalent to 5% of global supplies, thereby increasing the risk of an economic recession. Other analysts and traders believe the current losses are already at 4 million barrels per day. In the most severe of three scenarios modeled by the European Central Bank (ECB), Brent crude oil prices could peak at $145 per barrel.
Consultancy FGE NexantECA projects that worldwide demand will already contract by 5.3 million barrels per day this quarter, and a 12-week blockade of the Strait of Hormuz would push Brent crude to $154 per barrel. “Since there are no visible signs of catastrophe yet” in Western nations, people assume everything is fine, with the only perceived consequence being a slight rise in gasoline prices, explained Oystein Kasekoglu from FGE.
Nevertheless, demand suppression “is inevitable and is already occurring in waves,” he pointed out. “Asia was hit first, Africa will follow. Europe is beginning to see reports of shortages in certain fuel types and feel the impact of prices,” he added. In FGE’s most extreme scenarios, oil prices are projected to shoot up to $250 per barrel.
“If there is no resumption of operations within three months, it will become a macroeconomic problem, and the world will stand on the brink of recession,” warned Frederic Lasserre from Gunvor. His firm has already stress-tested against prospects of sharp oil price hikes to $200 or even $300 per barrel.
Particularly susceptible are the so-called middle distillates, which include diesel fuel, according to Bloomberg. Prices for this commodity in Europe exceeded $200 per barrel last month, hitting their highest level since 2022. In India, truck fleet operators are preparing for fuel rationing and the first substantial price increase in years, the agency reports.
“In a matter of weeks, we will start hearing reports of diesel supply issues—diesel is the backbone of the global economy, moving goods,” noted Vikas Dwivedi, a strategist at Macquarie Group, in an interview with Bloomberg Television. “When this hits diesel, that is when everyone will grasp and feel the impact,” he concluded.
“The price increases over the last month and a half have resulted in a sharp reduction in fuel demand from American consumers,” stated analysts at Barclays Plc. With average prices above $4, US drivers are purchasing 5% fewer gallons of gasoline than they did a year ago.
International Energy Agency (IEA) member countries, including the US, Germany, and Japan, have announced an unprecedented release of 400 million barrels in an effort to offset the substantial supply deficit; China has also drawn upon its reserves. “We have been borrowing supply,” remarked Russell Hardy, CEO of commodity trader Vitol Group. “But this cannot go on indefinitely. The necessity for demand rationing invariably leads to a recession.”
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