Global oil demand has fallen by about 4mn b/d since the start of the war in the Middle East, compared with supply losses of around 12mn b/d, trading firm Vitol's chief executive Russell Hardy said today.
Speaking at the FT Commodities Global Summit in Lausanne, Hardy said demand would have to fall further to rebalance the market if the strait of Hormuz remains effectively closed, with recessionary consequences. Most of the drop in oil demand so far has occurred in the Middle East, alongside weaker consumption in Asia, he said.
Hardy estimates that global refinery output is down by around 6mn b/d from pre-war levels, reflecting disruptions to crude feedstock supplies and infrastructure damage.
If the disruption carries on, "the problem gets more difficult to manage, because so far we've borrowed supply from various alternatives", he said, referring to falling oil-on-water inventories and emergency stock releases co-ordinated by the IEA.
Cumulative global oil production losses since the US-Iran war began on 28 February now total about 600mn-700mn bl and would rise to around 1bn bl even if the strait of Hormuz reopens in the near term, Hardy said.
"By the time this is over, we will have lost 300mn-400mn bl of product inventories," he said.
Even if oil exports resume soon, recovery across the supply chain would take time, he said. "The restart of production, the restart of refineries, there's an awful lot of infrastructure that's been shut down … it takes some time to put all of that back."
Mideast Gulf producers including Saudi Arabia, Iraq, Kuwait and the UAE have been forced to shut in upstream output because of limited alternatives to shipping their crude through the strait of Hormuz. Energy infrastructure across the region has also been damaged by military attacks during the conflict.
Hardy said oil prices since the war began have been driven by concern over near-term physical supply availability. "The price action is in physical oil at the front," he said.
"The third quarter onwards is less relevant in people's thinking because if the strait opens in 10 days' time, yes, recovery will take time, but oil will flow, and eastern customers will be better supplied for June and July."
A longer-term impact of the war could be a renewed push to build strategic fuel stocks, Hardy said, although such efforts would take time.
"If you want a strategic initiative of jet fuel, you've got to arrange tanks, airport access, and build those inventories," he said.
