Top Oil Traders Warn Worst of Demand Hit From War Is Yet to Come

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(Bloomberg) — The world’s top oil traders said that demand destruction wrought by the Iran war is set to deepen, a sign the full economic impact of the conflict may be yet to come.

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Gunvor Group on Tuesday said the amount of lost consumption may need to double next month to 5 million barrels a day — roughly 5% of world supplies — and could trigger a global recession if the key Strait of Hormuz waterway remains closed for three months. The reduction is so far concentrated in Asia, but will spread as global prices react, according to Trafigura Group. 

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Vitol Group Chief Executive Officer Russell Hardy said the war has removed about 4 million barrels a day of demand. He said that will grow as the situation persists and echoed Gunvor’s warning about recessionary consequences.

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Since the Iran war began at the end of February, crude oil and refined product supplies from the Persian Gulf have been slashed by roughly 13 million barrels a day, according to the International Energy Agency. While the cost of physical cargoes and products like jet fuel and diesel has surged, futures benchmarks have been relatively subdued.

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“Demand destruction is happening in places that are not visible pricing centers,” Trafigura Chief Economist Saad Rahim said at the FT Commodities Global Summit in Lausanne. “People are underestimating that loss of supply, that then has to be met with some loss of demand somewhere else.” 

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The response is evident in a range of industries. Petrochemical producers in China, Japan and South Korea have scaled back operations, reining in output of plastics used in everything from bottles to electrical appliances. Airlines in nations from Vietnam to the Netherlands are canceling flights or drawing up contingency plans to do so. Across Southeast Asia, harvest-ready rice fields are lying idle as fuel and fertilizer costs bite. 

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“That adjustment is already happening, but if this continues it has to get larger and larger,” Rahim said. “We’re at a critical inflection point.”

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Benchmark crude futures have rallied about 30% since the war began. They spiked near $120 a barrel in March, though are trading around $95 now on signs that Iran will attend talks with the US to end the conflict.

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If there’s a diplomatic resolution, “I think you have just about dodged the bullet,” Rahim said. But if the crisis drags on, “you just don’t have those molecules, somebody has to go without. So that means a contraction of economic activity.”

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Frederic Lasserre, Gunvor’s global head of research and analysis, told the conference that the trader is focused on three scenarios, ranging from the continued closure of Hormuz to a partial or full reopening.

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“If you don’t get any reopening in three months time, then the case becomes a macro issue where the world is about to fall into recession,” he said. “And then you have massive demand adjustment.”

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The IEA last week said that all the projected demand growth for this year had been wiped out for the first time since the Covid pandemic in 2020. Instead of 730,000 barrels a day of growth, the IEA now sees a shallow decline of 80,000 barrels a day. 

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The reduction is concentrated in particularly exposed sectors in Asia and the Middle East: Naphtha and ethane used in petrochemicals, and liquefied petroleum gas used in cooking.

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Another big impact is on aviation, as carriers including Vietnam Airlines, Air New Zealand, Scandinavia’s SAS AB and KLM cancel flights. Deutsche Lufthansa AG is readying plans to ground planes if necessary. 

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—With assistance from Yongchang Chin.

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