The severity of the ongoing energy crisis due to the Middle East conflict was evident this week as an unusual shift in the global oil benchmarks was noticed. The West Texas Intermediate (WTI) crude, generally trading at a lower mark than that of the Brent crude, briefly traded over the North Sea-focused benchmark. Although market participants attributed this to immediate supply tightness, expectations of relief later in the year remain uncertain, compounded by the mounting concern that the situation could escalate into widespread demand destruction. 

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Governments around the world have begun implementing regulations to introduce fuel consumption controls. In Asia, Indonesia has limited fuel purchases to 50 litres per day for private vehicles and directed civil servants to work remotely. Thailand is framing similar objectives, while Bangladesh, heavily dependent on imports that cater to 95 per cent of its fuel requirements, has already enforced rationing, shut universities as it continues to grapple with acute shortages.

The rationing trend is extending to Europe. Slovenia has become the first European nation to introduce fuel caps at 50 litres per day, similar to Indonesia. While most customers may take the restrictions as a symbolic measure, it indicates a broader shift towards demand management strategies in the foresight of prolonged supply disruptions.

Considerable pressure remains on supplies. According to Kpler, cumulative oil production losses due to the ongoing conflict have added up to 133 million barrels, the daily output declining enough to cross 10 million barrels. If the tensions persist, total losses could reach the 400 million barrels indicated by the International Energy Agency, which would be released from reserves to stabilise markets. 

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Tightening supply has already begun to redraw the trade map. European diesel futures soared to USD 200 post reports of diverting US-bound shipments to Asia. Policymakers in the European Union are now actively weighing rationing options to handle the crisis. Acknowledging the grave situation, Dan Jorgensen, EU Energy Commissioner, noted, “This will be a long crisis … energy prices will be higher for a very long time.”

As prices surge with squeezed availability, the risk of demand destruction is becoming more pronounced. This may be propelled through policy-based restrictions or as a natural reaction to unaffordable energy costs. While governments have already released strategic reserves and redirected supplies, attention is now turning to consumption control.

Following stockpile releases and supply rerouting, Bloomberg columnist Javier Blas described demand reduction as the “fourth step” in managing supply shocks. However, whether managed or market-driven, such measures are expected to weigh heavily on economic activity.

To stabilise markets, analysts estimate that global oil demand may need to decline by at least 8 million barrels per day. Regulations have been proposed, such as reduced speed limits, improved fuel efficiency, more reliance on public transport, and work from home. Yet, the effectiveness of these interventions remains uncertain, raising the likelihood of a combined impact from both policy-driven and spontaneous demand reductions.

Returning to normalcy in the near future is unforeseen if the conflict persists. Analysts have noted that recovery could take three to six months after the tensions have settled down. However, prolonged disruptions are likely to further extend this timeline, especially because restarting the dormant production becomes increasingly complex over time.

 

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