How long can demand destruction keep oil prices from rising?

In what appears to be a somewhat puzzling development for energy markets, oil prices have yet to surge to record highs despite what many consider the most severe supply disruption in the history of the market.

This is largely because traders continue to bet on a relatively quick resolution to the Strait of Hormuz crisis, even though it has now persisted for more than three months. Global inventories have also provided a temporary buffer against the shock, while China, the world's largest crude importer, has largely stepped away from the spot market. Most importantly, demand destruction is accelerating as high prices force consumers to cut consumption.

Beyond the current supply disruptions and conflicting signals surrounding the Middle East conflict, analysts are increasingly focused on how much demand could be lost permanently even after the crisis ends.

Inventories are cushioning the shock—for now

The global oil market entered the Iran conflict with a supply surplus, helping limit upward pressure on prices despite the war entering its fourth month. However, global inventories outside China are being depleted at a record pace, suggesting that the market’s safety cushion is rapidly shrinking and that the full impact of lost supplies may soon become visible.

According to data from Kpler, China alone accumulated more than 1.2 billion barrels of strategic and commercial inventories over the past year, while the rest of the world has experienced accelerating inventory drawdowns.

In early May, global stockpiles were being drawn down at a rate of roughly 1.5 million barrels per day. That pace has now increased to nearly 1.7 million barrels per day, pointing to growing supply tightness.

As inventories decline and oil prices rise above $100 per barrel, consumers have begun reducing demand. Across Asia, governments and consumers have responded to higher fuel costs by implementing measures such as shorter workweeks and expanded work-from-home arrangements for public-sector employees.

The trend is not limited to Asia. Consumers in Europe and the United States have also begun cutting fuel consumption and reducing air travel as gasoline prices and airline fares climb.

In the United States, cumulative gasoline costs paid by consumers since the start of the US campaign against Iran on March 1 have risen by roughly $40 billion, according to Patrick De Haan, Head of Petroleum Analysis at GasBuddy. He added that Americans have been paying between $400 million and $600 million more per day for gasoline over the past three months.

De Haan also noted that the US Strategic Petroleum Reserve is less than ten days away from falling to its lowest level since August 1983, a level not seen since the reserve began being filled in 1977.

Demand destruction gains momentum

As costs rise, consumers are rethinking their fuel spending habits. Normally, declining inventories would lead to much sharper increases in oil prices.

However, the scale of demand destruction has so far been large enough to offset part of the supply shock, especially when combined with China's absence from the spot market after building inventories sufficient for several additional months.

In China alone, oil demand has unexpectedly fallen by about 9%, equivalent to roughly 1.5 million barrels per day, according to JPMorgan analysts Natasha Kaneva, Lyuba Savinova, and Artem Vakhritin.

The analysts described the shift as a “quiet economic decision,” noting that many Chinese consumers have transitioned to electric transportation.

Similar changes are beginning to emerge elsewhere. Sales of electric vehicles continue to grow strongly across Asia and Europe, while US consumers, despite the absence of major federal incentives, are increasingly reconsidering private vehicle use and turning more frequently to public transportation and remote work as gasoline prices reach four-year highs.

Will demand return after the crisis?

The key question for analysts and the oil market over the medium and long term is whether demand will return to previous levels once the crisis ends, or whether governments and policymakers will permanently replace part of their oil and gas consumption with lower-carbon alternatives such as electric vehicles, solar power, and wind energy in order to reduce exposure to future geopolitical energy shocks.

JPMorgan analysts asked a fundamental question: “Can the world really function while consuming roughly 9% less oil?”

For now, the options remain limited. With the Strait of Hormuz still closed, inventories continue to fall toward critical levels, while consumers seek alternatives through electric vehicles or simply by driving and traveling less.

The longer the Hormuz crisis persists, the greater the supply disruption becomes, increasing pressure on governments to adopt long-term measures aimed at reducing dependence on Middle Eastern oil and gas.

As a result, part of the demand destruction that began as a temporary response to the crisis could ultimately become permanent.

At present, demand destruction is helping to restrain oil prices.

Commodity analysts at Goldman Sachs said that reduced consumption caused by higher prices is partially offsetting the impact of the actual supply shortage.

However, the inventory cushion that has supported the market is approaching exhaustion. Even China has begun drawing down its reserves, and with crude purchases expected to recover in the coming months, oil prices could experience a significant rally this summer, accompanied by the emergence of genuine supply shortages.