(Bloomberg) — The oil shock in the Strait of Hormuz has yet to crush demand as the rich world borrows from its stocks and pays to secure supply. Investors are now sounding the alarm that tough regulation is coming.
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Traders say if the vital oil channel does not reopen, consumption will have to readjust at a lower level to accommodate supplies falling by at least 10%. And for that to happen, people will need to buy less, either through prices they can’t afford or through government intervention to reduce consumption.
A billion barrel supply loss is almost guaranteed anyway; This is more than double the emergency inventories announced by governments shortly after the conflict began at the end of February. Buffers are running out 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 such as petrochemicals in Asia is quietly spreading to daily markets around the world.
“Demand destruction is happening where pricing centers are not visible,” Saad Rahim, chief economist at trader Trafigura Group, said at the FT Commodities Global Summit in Lausanne this week. “This regulation is already happening, but if this continues it needs to grow further. We are at a critical turning 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 hit immediately when the United States and Israel first attacked Iran on February 28.
Now, as the impasse between US President Donald Trump and his Iranian rivals continues, influence is increasingly shifting west and towards products that are central to consumers’ daily lives.
Airlines in Europe and the US are cutting thousands of flights. Analysts are warning of weakness in consumption of gasoline and diesel, which is used to power everything from trucks to construction equipment, after prices reached $4 per gallon in the United States.
According to the International Energy Agency, which coordinates emergency measures of major economies against supply shocks, global oil demand is experiencing the sharpest decline in the last five years this month.
Trading giant Gunvor Group predicts losses could double next month to 5 million barrels a day, or 5% of world supply, and other major traders also see a growing risk of economic recession. Other analysts and traders say the impact has already reached around 4 million per day.
This fee is starting to take shape. While Germany halved its economic growth forecasts, the International Monetary Fund cut its global forecasts, citing the war. In the most “severe” of three scenarios modelled by the European Central Bank, Brent prices rose to $145 a barrel, halving the region’s growth. Brent crude oil closed at around $105 per barrel on Friday.
The need to adjust oil demand and economic activity to a lower level, most likely through prices that discourage consumption, will increase with each day the strait remains closed.
in the waves
Worldwide demand is already facing a 5.3 million barrel-per-day hit, according to consultant FGE NexantECA, and a 12-week disruption at Hormuz would cause Dated Brent, the world’s main physical crude oil price, to rise to $154 a barrel, above this month’s record.
“Since there is still no visible disaster in the West, people think everything is fine and the only impact is slightly higher pump prices,” said Cüneyt Kazokoğlu, FGE’s director of energy transition. But demand destruction “is the future, and it comes in waves. Asia was first, Africa is next. Europe is already talking about shortages of some fuels and feeling the price impact.”
Ultimately, in a market where demand must adjust to match low supply, oil prices may be what drives this recalibration.
In extreme scenarios where price alone forces the market into equilibrium, FGE estimates that crude oil would need to rise to $250 per barrel.
Some analysts have said privately that extreme uncertainty about what will happen in conflict makes modeling the demand impact nearly impossible. However, without a quick solution, the economic consequences could be severe.
Frederic Lasserre, head of research at Gunvor, told the FT Commodities Global Summit in Lausanne: “If you don’t have any reopening within three months, then the case becomes a macro issue where the world is about to go into recession.” The company even subjected the possibility of oil rising to 200 or even 300 dollars per barrel to a stress test.
A particularly sensitive area is the so-called middle distillates, including diesel. Prices in Europe exceeded $200 per barrel last month, reaching their highest level since 2022. Truck fleet operators in India are preparing for fuel rationing and the first significant diesel price increases in years.
“In another few weeks, we will start to see announcements of problems with securing supplies of diesel – it is the backbone of the world economy in transporting goods,” Vikas Dwivedi, a strategist at Macquarie Group, said in an interview on Bloomberg television. “When diesel comes into play, that’s when we’ll all know it and feel it.”
Aviation is also particularly vulnerable. Airlines in Asia were among the first to react, with Vietnamese carriers and Air New Zealand cutting routes. The impact is now spreading, with Deutsche Lufthansa AG canceling 20,000 short-haul flights from its European summer schedule and KLM restricting its operations.
Even in the U.S., relatively shielded from the crisis by a glut of domestic energy, United Airlines Holdings Inc. is cutting planned growth by about 5% and now expects capacity, or available seat miles, to remain flat in the second half of 2026, up about 2% from a year earlier.
Gasoline is starting to feel its impact: American drivers may be spending more on fuel, but at average prices above $4, they’re buying 5% fewer gallons than they did a year ago, according to Barclays Plc.
“High prices over the past month and a half have led to reduced demand from the US consumer,” said bank analysts including Josh Grasso and Amarpreet Singh.
In the weeks after the war broke out, consumer countries moved to buy themselves some time.
IEA countries such as the USA, Germany and Japan announced an unprecedented release of 400 million barrels of oil to close the widening supply gap, and China also used its buffer. But such stockpiles erode the world’s security measures, ultimately leaving it more vulnerable.
“We borrowed the supply,” Russell Hardy, chief executive of Vitol Group, the largest independent trader, said at the FT Commodities Global Summit in Lausanne this week. “But you can’t do that forever. Having to ration that demand has recessionary consequences.”
–With assistance from Alex Longley, Rachel Graham, Paul Burkhardt, Kathy Chen, Bill Lehane, Jack Wittels, Lucia Kassai, Mia Gindis, and Kate Duffy.
(Updates with Brent crude price in tenth paragraph. A previous version of this story corrected the name of the conference in the fourth paragraph.)
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