REUTERS

While oil demand destruction deepens with each passing day the Strait of Hormuz remains closed, the longer‑term impact of the Iran war may paradoxically work in oil’s favour. Spiking energy security concerns and greater fragmentation could lead to a less efficient, more voracious global energy system.

Aggregate worldwide oil consumption is plummeting under the ​strain of the Iran war, which has reduced global crude supplies by 13 million barrels per day (bpd), or 12 percent, since the conflict broke out on February 28.

Demand has so far been ‌curtailed by around 4 million bpd, roughly 4 percent of global consumption, according to Russell Hardy, CEO of oil trading house Vitol.

Hardy’s estimate of demand destruction is considerably higher than that of the International Energy Agency, which puts the loss at 2.3 million bpd for April. Even so, it still represents the largest monthly collapse in consumption since the depths of the Covid‑19 pandemic in 2021.

The IEA expects global oil demand to contract by 80,000 bpd in 2026, a dramatic reversal from its pre‑war ​forecast for 730,000 bpd of growth.

Much of that loss reflects refiners, especially in Asia, scaling back operations or shutting units altogether to conserve fuel as supplies from the Middle East dry up. ​The region normally accounts for around 60 percent of Asia’s crude imports.

Governments from Sri Lanka to South Korea have compounded this effect by rolling out emergency energy‑saving measures including four‑day work weeks, work-from-home mandates, restrictions on driving and outright fuel rationing.

The surge in diesel and jet fuel prices to record highs of over $200 a barrel has cut deeply into transport demand - ​grounding aircraft and curtailing shipping activity.

This demand destruction is no longer confined to Asia. It is now spreading to Europe, which relies on the Middle East for around 10 percent of its crude imports and more than ​half of its jet fuel demand. After over seven weeks of disruption, inventories are growing dangerously thin.

Parts of Europe’s refining industry have been pushed out of the money. Futures markets are pricing in expectations of a relatively swift recovery in Gulf flows and a subsequent drop in prices, while physical crude remains very hard to source and very expensive.

US stocks ended lower on Tuesday, with the Dow, S&P 500 and Nasdaq all shedding more than half a percent.

When the Strait of Hormuz will reopen and how quickly shipping will normalise remain anyone’s guess. If the closure extends into May, global oil demand could ​contract by as much as 5 million bpd next month.

Should the blockade persist long enough to exhaust both commercial inventories and strategic petroleum reserves, consumption would theoretically need to fall by around 10 million bpd - ​a tenth of pre-war demand. That’s a highly bearish scenario, but not an impossible one.

The short-term demand hit makes for gloomy reading. But the conflict may also set in motion longer-lasting changes with a more ‌mixed impact on consumption.