Is curbing oil demand the way ahead to stabilize global energy markets? That could be the case as the global energy landscape stares at a critical rebalancing act.
The escalating conflict in West Asia is forcing the global oil market into a phase of “demand destruction”, with nearly 4.8 million barrels per day (mbpd) of supply shortfall expected to be absorbed through lower consumption, according to a report by PL Capital.
Global oil prices have been on the boil since the outbreak of the conflict between the US and Iran, triggering the biggest energy crisis. However, prices fell briefly on account of the two-week ceasefire agreed on 8 April. Though US President Donald Trump announced an extension of the ceasefire at the end of the deadline, prices continued to rise, hovering around $120 per barrel amid uncertainty over a truce.
Prior to the war, the Strait of Hormuz – a narrow maritime chokepoint – exported nearly 15 mbpd of crude oil, representing nearly 20% of global oil trade, according data from the International Energy Agency (IEA).
The ongoing blockade in the Strait has disrupted these flows. The report estimates that only about 10.2 mbpd can be offset through: alternative transit routes through Saudi Arabia and UAE (6.2 mbpd); strategic reserves released by the IEA (3.0 mbpd); and selective transit offered by Iran to friendly nations (1.0 mbpd).
This has effectively left a residual gap of nearly 4.8 mbpd. The gap “represents the volume of crude supply that is currently absent from global markets and cannot be offset, unless some extra releases take place,” the report said.
With no further respite in sight, the burden of rebalancing has thus shifted to the demand side, with the remaining gap likely to be addressed through reduced demand. Early signs of this “demand destruction” are already emerging, as fuel prices continue to soar and are likely to be passed on to the end-users.
Countries have begun implementing measures to curb consumption. These include work-from-home mandates, limits on air conditioning usage, restrictions on government travel, fuel rationing, and promotion of public transport.
India, despite its heavy dependence on imported crude, has so far refrained from raising petrol and diesel prices—a politically sensitive move. While the government has imposed caps on industrial natural gas usage, retail fuel prices remain unchanged for now even as prices for commercial use is rising. On 1 May, the prices of 19 kg commercial LPG were hiked by ₹993. Can India continue the status quo remains to be seen going forward.