The world’s top oil traders warned that the ongoing closure of the Strait of Hormuz is increasing the risk of a global recession as fuel demand takes a hit.
The vital energy channel has been largely closed to non-Iranian shipping since war began at the end of February, choking off hundreds of millions of barrels of supply. Consumer nations have been using up buffer inventories that they hold for emergencies to cope with the shortfall.
While international forecasters already acknowledge that conflict is sapping economic growth and oil demand, merchants including Vitol Group, Gunvor Group and Trafigura Group warned on Tuesday that the situation will get even worse if Hormuz doesn’t open up soon.
“We’ve borrowed supply,” Vitol Group Chief Executive Officer Russell Hardy said at the FT Commodities Global Summit in Lausanne, pointing to drawdowns of inventories from a variety of sources. “But you can’t do that forever. There are recessionary consequences from having to ration that demand.”
Benchmark oil futures rallied about 30% since the war began. They spiked to almost $120 a barrel in early March but have since subsided, trading near $95 on Tuesday amid tentative hopes the US and Iran can reach some kind of peace deal.
Trickle of Ships
Hardy said the war so far eliminated about 4 million barrels a day of demand, a figure that will rise if Hormuz stays shut.
Tracking the electronic signals of tankers suggest that only a few are passing through Hormuz, including some that are linked to Iran but aren’t leaving the region. Some carriers are sneaking through with their transponders off.
Gunvor’s head of research, Frederic Lasserre, told the FT event that the amount of lost consumption may need to double next month to 5 million barrels a day — roughly 5% of global supply — in order to balance markets, and that a three-month closure of the waterway could trigger a worldwide recession.
Crude oil and refined product supplies from the Persian Gulf have been slashed by roughly 13 million barrels a day since the war started, according to the International Energy Agency. While the agency projects a sharp drop of 1.5 million barrels a day in demand this quarter, it anticipates a recovery in the second half of the year.
The consumption hit is so far most concentrated in Asia, but will spread as global prices react, according to Trafigura Group.
“Demand destruction is happening in places that are not visible pricing centers,” Chief Economist Saad Rahim said at the event. “People are underestimating that loss of supply, that then has to be met with some loss of demand somewhere else.”
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.
“That adjustment is already happening, but if this continues it has to get larger and larger,” Rahim said of the need for demand to recalibrate in response to lower supply. “We’re at a critical inflection point.”
The US is still in the dark on whether Iran will take part in fresh talks to end the war before a ceasefire expires on Wednesday, with the sides deadlocked on issues including access to Hormuz.
Should there be 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.”
Gunvor’s Lasserre told the conference that the trader is focused on three scenarios, ranging from the continued closure of Hormuz to a partial or full reopening.
“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.”
Written by: Grant Smith, Alex Longley, Jack Farchy, and Archie Hunter — With assistance from Yongchang Chin @Bloomberg
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