(Bloomberg) — The oil supply shock in the Strait of Hormuz has not yet dampened demand, as the rich world taps into its stocks and pays more to guarantee supplies. Now, traders are sounding the alarm that a tough adjustment is coming.
The longer the vital oil export channel remains closed, traders say, the greater the downward recalibration of consumption will have to be to align with a supply that has already fallen by at least 10%. And, for this to happen, people will have to buy less — either because prices will become prohibitive, or because of government intervention to force a reduction in consumption.
A loss of 1 billion barrels of supply is already virtually certain — more than double the emergency stocks that governments released shortly after the conflict began at the end of February. The security “mattresses” are being used quickly, which helps, for now, to contain the rise in oil prices. But as the lockdown enters its ninth week, the demand destruction that began in less visible sectors such as petrochemicals in Asia is quietly spreading to everyday markets around the world.
“Demand destruction is happening in places that are not visible centers of price formation,” said Saad Rahim, chief economist at trading firm Trafigura Group, at the FT Commodities Global Summit in Lausanne this week. “This adjustment is already underway, but if this continues, it will have to get bigger and bigger. We are at a critical inflection point.”
The most dependent sectors and markets—including petrochemical plants in Asia and the Middle East, and shipments of liquefied petroleum gas (LPG), an essential cooking fuel in India—felt the immediate impact when the United States and Israel attacked Iran on February 28.
Now, as the standoff between US President Donald Trump and his Iranian adversaries drags on, the impact is shifting increasingly to the West — and to derivatives that are central to consumers’ everyday lives.
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Airlines in Europe and the US are cutting thousands of flights. Analysts warn of weakness in gasoline consumption after prices reached US$4 per gallon in the US, and also of diesel – used to power everything from trucks to construction machines.
Global demand for oil is heading for the biggest drop in five years this month, according to the International Energy Agency (IEA), which coordinated emergency measures by major economies to react to the supply shock.
Trading giant Gunvor Group estimates the loss could double next month to 5 million barrels a day, or 5% of global supply, and, along with other major traders, sees a growing risk of economic recession. Other analysts and traders say the impact has already reached close to 4 million barrels per day.
This cost begins to materialize. Germany cut its economic growth forecasts in half, while the International Monetary Fund (IMF) slashed global projections, citing the war. In the most “severe” scenario of three simulated by the European Central Bank, Brent prices reach a peak of US$145 per barrel and cut the region’s growth in half. Brent closed at around $105 per barrel on Friday.
The need to adjust oil demand and economic activity downward — most likely through prices that discourage consumption — only increases with each day that the strait remains closed.
In waves
World demand is already facing an impact of 5.3 million barrels per day this quarter, and a 12-week interruption in Hormuz would lead Dated Brent, the main physical reference for oil in the world, to surpass this month’s record and reach US$154 per barrel, according to consultancy FGE NexantECA.
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“Because there is still no ‘visible disaster’ in the West, people think everything is fine and that slightly higher prices at the pump are the only impact,” said Cuneyt Kazokoglu, director of energy transition at FGE. But the demand destruction “will come and is coming in waves. Asia was first in line; Africa is next. It has already started talking about the shortage of some fuels and feeling the impact of prices.”
Ultimately, in a market where demand needs to adjust downward to match lower supply, oil prices could be the factor that forces this recalibration.
In extreme scenarios, in which only the price makes the market balance, FGE estimates that crude oil would have to skyrocket to US$250 per barrel.
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Several analysts have said privately that the extreme uncertainty over the outcome of the conflict makes it nearly impossible to model the impact on demand. But without a quick resolution, the economic consequences could be profound.
“If there is no reopening in three months, it becomes a macroeconomic problem where the world is on the verge of falling into recession,” said Frederic Lasserre, head of research at Gunvor, at the FT Commodities Global Summit in Lausanne. The company even carried out stress tests with the hypothesis that oil would rise to US$200 or even US$300 per barrel.
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One particularly sensitive area is so-called middle distillates, which include diesel. Prices in Europe surpassed $200 per barrel last month, the highest level since 2022. In India, truck fleet owners are bracing for fuel rationing and the first significant diesel price increases in years.
“In just a few weeks, we will start to see announcements of problems securing diesel supplies — which is the backbone of the global economy for transporting goods,” said Vikas Dwivedi, a strategist at Macquarie Group, in an interview with Bloomberg Television. “When it hits the diesel, that’s when we’ll all notice it and feel it.”
Aviation is also particularly vulnerable. Airlines in Asia were among the first to react, with companies in Vietnam and Air New Zealand cutting routes. Now the impact is spreading: Deutsche Lufthansa AG has canceled 20,000 short-haul flights from its European summer network, and KLM is also reducing operations.
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Even in the U.S. — relatively shielded from the crisis by its abundance of domestic energy — United Airlines Holdings Inc. is trimming planned growth by about 5% and now expects capacity, measured in available seat miles, in the second half of 2026 to be flat or up as much as 2% from a year earlier.
Gasoline is starting to feel the effect: American drivers may be spending more on gas, but with the average price above $4, they are buying 5% fewer gallons than they did a year ago, according to Barclays Plc.
“Higher prices over the past month and a half have led to the destruction of U.S. consumer fuel demand,” said bank analysts including Josh Grasso and Amarpreet Singh.
In the weeks following the start of the war, consumer countries moved to buy time.
IEA member nations such as the US, Germany and Japan announced an unprecedented release of 400 million barrels to try to plug the huge hole in supply, and China has also tapped into its reserves. But depleting these stocks erodes the world’s safeguards, ultimately leaving it more exposed.
“We borrow oil from the future,” said Russell Hardy, chief executive of Vitol Group, the largest independent trader, at the FT Commodities Global Summit in Lausanne this week. “But you can’t do this forever. There are recessionary consequences to having to ration this demand.”
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