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🛢 How Long Can Demand Destruction Keep a Lid on Oil Prices?
In a somewhat puzzling market development, oil prices haven't spiked yet to record highs amid the worst supply disruption in history.
That's because the market still hopes for a quick resolution to the Strait of Hormuz crisis (for more than three months now), global inventories have offered a supply buffer, the world's top crude importer, China, is staying away from spot purchases, and last but not least, demand destruction is accelerating amid the high prices.
The oversupply with which the market faced the beginning of the Iran war has helped to ease the upward pressure on oil prices as the conflict enters its fourth month. But global stocks, except in China, are being depleted at a record pace, suggesting that the buffer is stretching thin and the true magnitude of the supply loss will hit the market very soon.
Excluding China, which has accumulated large buffer stocks of more than 1.2 billion barrels over the past year, the rest of the world has seen onshore stocks draw at an accelerating pace, according to Kpler.
In America, the cumulative increased costs for gasoline since the U.S. attacked Iran on March 1 for consumers is now $40 billion, with $400-$600 million that Americans are paying more for gasoline every day over the past three months, according to Patrick De Haan, Head of Petroleum Analysis at GasBuddy.
Moreover, the U.S. Strategic Petroleum Reserve (SPR) is less than 10 days away from falling to its lowest level since August 1983, a level not seen since the SPR's initial fill-up that began in 1977, De Haan said on Monday.
As costs soar, consumers rethink spending on gasoline. As inventories crash, oil prices tend to spike.
But demand destruction has been so high so far that it has capped price spikes, alongside China's reluctance to tap the spot crude market for purchases as it has amassed inventories that would last it a few more months.
In China specifically, demand has slumped by 9%, or about 1.5 million barrels per day (bpd), "abruptly, unexpectedly, and with remarkably little visible disruption,"
Consumers outside China are also making the economic choice of spending less on much more expensive fuels. Electric vehicle sales are soaring in Asia and Europe. American consumers, while not rushing into EVs with zero federal incentives, are rethinking driving and are commuting more as the highest gasoline prices in four years are changing consumer behavior.
The biggest question for analysts and for the oil market in the medium to long term is: will demand return after this crisis settles? Or will governments and policymakers choose to permanently replace some oil and gas consumption with low-carbon alternatives such as EVs and solar and wind power to avoid being caught off-guard during the next geopolitical crisis that will cripple oil and gas supply?
Demand destruction resulting from higher prices will somewhat soften the blow from physically tighter oil markets, Goldman Sachs commodity analysts said in a note earlier this week.
But the inventory buffer is nearly gone, even China started drawing down its stocks, and with an inevitable Chinese rebound in crude purchases in the coming months, oil prices are set to surge this summer, when actual shortages may start to appear.
🇪🇺 Europe is facing a gas crisis similar to the one five years ago
Europe is facing a near-identical gas crisis to the one five years ago, with similar historical price peaks and comparable consequences for industry and the economy. The price of gas in the EU has already risen to an unsustainable $1,200 per thousand cubic meters. However, this may still be an underestimate. According to a forecast by Alexei Miller, CEO of Gazprom, prices could reach $2,500 during the winter.
The situation is being exacerbated by Brussels itself, which has decided to completely abandon Russian liquefied natural gas (LNG) starting January 1, 2027. Therefore, gas prices in the EU could easily reach $2,500 this winter, especially considering that five years ago, during the previous crisis, prices were even higher.
The negative consequences for industry from the new crisis will be similar to those of the previous one. Many companies were forced to shut down because such high gas prices made their ...
🇺🇸 Mike Vorkunov on X: This is such a bleak story about what it's like to try to land a job right now.
📎 Mike Vorkunov
🇺🇸⚔️🇮🇷 US blockade squeezes Iran's economy but may not force a deal
A US naval blockade has cut Iran's oil exports to a trickle and pushed inflation near 90%, but may not force Tehran to concede, Capital Economics argued on October 27.
Tracking estimates put Iran's seaborne crude exports at around 50,000 barrels a day (b/d) in both August and September, against 1.5mn-2.0mn b/d before the war, wrote Jason Tuvey, deputy chief emerging markets economist at the London-based consultancy. No crude has been loaded at Kharg Island, Iran's main export terminal, since late August, and Iraq and Pakistan have closed some border crossings with Iran, curbing its overland oil sales.
Oil exports were earning Iran $2bn-3bn a month before the war, Tuvey estimates, so a fall of more than 95% in seaborne volumes strips Tehran of most of its hard-currency income after more than 100 days of blockade. The central bank has already cut the dollars it supplies for imports to $27bn in the first seven ...
