High oil prices are "killing demand": shocks erupting from Asia

Affected by rumors of potential US-Iran negotiations, Brent crude oil prices temporarily lost upward momentum, falling back to $96. However, supply-side tensions have not eased: oil flow through the Strait of Hormuz remains over 95% below normal levels, and the overall Persian Gulf oil flow gap has widened to 17.7 million barrels per day. Meanwhile, demand pressures are accelerating.

Refining capacity has been severely impacted, causing a sharp rise in refined product prices, with demand destruction effects spreading from Asia. Several airlines are reducing flights due to rising fuel costs, and many Asian countries are implementing stay-at-home policies to control road fuel consumption. South Korea and other economies have introduced bans or price controls on gasoline, jet fuel, and diesel exports. Analysts warn that if supply chains cannot recover within a few days, demand destruction will quickly spread to Europe and globally.

On the supply side, recent statements from Trump regarding potential US-Iran negotiations, combined with ceasefire rumors, have pressured oil prices downward. According to CCTV News, Iran’s Hatam Abiyah Central Command spokesperson directly told the US on the 25th: “The US is negotiating with itself; don’t call your failure an agreement.”

Although Iran officially denies contact with the US, Israel later confirmed indirect communication between the two sides, briefly easing market fears of prolonged disruption. Goldman Sachs currently expects the Strait of Hormuz oil flow interruption to last until April 10.

Under the dual pressures of supply and demand, high oil prices are turning from regional phenomena into a global challenge, with “backlash” effects on demand.

Demand Destruction: Asia Leads the Pressure, Risks of Spread Rise

The cumulative effects of supply chain shocks are accelerating into tangible demand destruction. Prices for jet fuel and diesel have surged significantly, clearly suppressing end-user consumption. Several airlines are reducing flights, and some Asian policymakers are promoting broader stay-at-home measures to ease road fuel demand.

On the policy front, South Korea has set price caps on gasoline and diesel to protect domestic consumers from wholesale price spikes. Several European countries have also introduced export restrictions on certain oil products.

Analysts point out that current demand destruction is still in its early stages and concentrated in Asia. If supply chain recovery does not occur within days rather than weeks, this effect will rapidly spread to Europe and eventually impact other regions globally. Historical experience shows that once refined product shortages trigger chain reactions, recovery periods tend to be much longer than initially expected.

Energy Shock Spreading Globally, Market Reassesses Inflation Risks

The energy shock is transmitting to broader asset classes. Crude oil prices, US Treasury yields, and breakeven inflation rates are tightening again, with markets quickly repricing the “second round of inflation,” rather than dismissing it.

In the interest rate markets, if the US 10-year Treasury yield breaks above 4.4%, this situation will no longer be confined to interest rates alone but will evolve into systemic pressure across stocks, credit, and exchange rates. Currently, equity markets are underpricing this risk.

Emerging markets are facing a triple impact from rising oil prices, interest rates, and volatility. The EEM (Emerging Markets ETF) is testing key support levels, and the VXEEM volatility index for emerging markets is rising rapidly. If support levels break, selling pressure could accelerate rather than ease.

Supply-side pressures remain unresolved, with offshore oil storage nearing capacity

The situation in the Strait of Hormuz remains grim, continuing to support high oil prices. Over the past few days, the daily number of oil tankers passing through the strait has been about 2, with oil flow down over 95% from normal levels, though it has recently rebounded slightly. US officials confirm that Iranian laid mines are still present in the strait, posing ongoing shipping threats.

Broader Persian Gulf flow data are also severe. After rerouting through the Banyas and Fouchana ports, the loss of flow in the Gulf (4-day moving average) has expanded to 17.7 million barrels per day. The through-strait flow is 98% below normal, at about 400,000 barrels per day, with pipeline rerouting providing a net supplement of about 1.9 million barrels per day.

Meanwhile, floating storage in the Persian Gulf has increased by 74 million barrels since February 27, approaching the estimated maximum capacity of onboard storage at that time, indicating that offshore storage capacity in the Gulf region is tightening. If supply-side pressures further transmit downstream, this will add new uncertainties to the already demand-damaged refined product markets.

Refining Facilities Become Main Targets, Refined Oil Supply Dilemma Remains Unresolved

Supply-side pressures are extending from crude oil to refined products. The IEA estimates that since the conflict erupted, at least 40 energy assets in the Middle East have suffered serious damage. Notably, most of the damage is concentrated on refining facilities rather than crude production sites, which are mostly still shut down preventively.

Among these, Kuwait’s Mina Al-Ahmadi refinery was attacked last Friday, prompting Goldman Sachs to raise its estimate of Middle Eastern refining capacity disruptions to 2.3 million barrels per day. Ongoing damage to refining capacity means that even if crude output remains relatively stable, the supply tightness of refined products will persist.

In recent days, attacks on energy assets have somewhat subsided, but Israel and the US have previously targeted Iranian gas facilities in Isfahan Province. Market concerns about new rounds of action remain, and risk premiums on Gulf energy infrastructure stay high.

Risk Warning and Disclaimer

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