The oil market's COVID moment
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The oil shortage brought on by the Iran war will spread throughout the world, much as COVID-19 did, moving from east to west and leaving a path of destruction in its wake, a new analysis says.
Why it matters: If the oil shock plays out along those lines, it would mean the global economy has only just begun to feel the pain of the war's impact.
Catch up quick: During the pandemic, demand for oil plummeted by about 7 million barrels a day.
- Gas prices plunged, and at one point oil prices went negative in the U.S.
State of play: Now there's about twice as much oil missing from the global market because tankers can't get out of the Strait of Hormuz.
- But we haven't yet seen a disruption that looks anything like the pandemic.
The big picture: If this crisis continues, and millions of barrels of oil are sucked out of the global economy, the situation will get nasty.
- It will lead to what economists call "demand destruction," as Peter Coy explained Monday on Substack.
- That means that prices have to get high enough to force people and companies and economies to stop using oil — "to get a whole bunch of cars and trucks off the road, ships off the seas, planes out of the sky, et cetera," Coy wrote.
- "In a word, ugliness."
Where it stands: The oil market is sleepwalking amid this reality. While prices are now up around 40% since the war started, the market is still pricing in a relatively quick end to the conflict.
- You can see that in the price for Brent oil, the global benchmark, set for delivery this summer — it's still trading for under $100 per barrel.
Zoom in: That's partly because the crisis is unfolding over a stretched-out time horizon in a way similar to the pandemic, Natasha Kaneva, head of global commodities research at JPMorgan, explained in a note.
- "Much like during COVID, the shock unfolds sequentially rather than simultaneously—a rolling supply disruption moving westward, dictated by shipping times and buffered unevenly by regional inventories."
How it works: With the last tanker leaving the Strait of Hormuz before the war's start on Feb. 28, "voyage times set the clock," she wrote.
- Cargoes from the Persian Gulf reach Asia in about 10 to 20 days, first India, then northeast Asia.
- Europe and Africa see new supply in 20 to 35 days, which means they just got a fresh batch.
- The U.S. Gulf Coast is at the end of the line, roughly 35 to 45 days.
Yes, but: Iran has let a few tankers through, but not enough to make a real dent.
Zoom out: That means that while Asia is already feeling the squeeze of lost supply — along with school closures, rationing, flight cancellations and more fallout — other regions haven't yet begun to deal with the cutoff.
- Europe will get there by mid-April, and the U.S. is last in line.
- Because the U.S. is an oil exporter, shortages are unlikely — but further price increases are inevitable.
Reality check: There are still many who believe the conflict will end before it gets this bad.
- President Trump has signaled at times that he wants to make a deal, with the pressure of looming midterms.
- Plus, the U.S. economy is less energy intensive than in previous oil shocks, as Axios' Neil Irwin explains.
The bottom line: Six years after the pandemic, there's another global crisis gaining momentum on the other side of the world — and once again, the reality of the threat hasn't quite hit home.
