Closure of Strait of Hormuz could trigger downturn on scale of 2008 crisis

The closure of the Strait of Hormuz until August would significantly increase the risk of an economic downturn approaching the scale of the 2008 global financial crisis.

Source: Bloomberg

Details: Under the baseline scenario, the strategic waterway would reopen in July. This would reduce average oil demand by 2.6 million barrels per day, while spot prices for Brent crude would peak at around US$130 per barrel during the summer.

However, a longer disruption would require a much sharper decline in demand to offset the supply shock in August and September. This could be enough to cause a year-on-year contraction in global oil consumption in 2026. Several leading forecasters are already expecting a rare decline in worldwide demand this year.

Oil prices have nearly doubled since late February as the war involving the United States, Israel and Iran has unsettled global markets and raised concerns about a simultaneous surge in inflation and slowdown in economic growth.

A disruption lasting until August would deepen the supply deficit in the third quarter to around 6 million barrels per day, Rapidan Energy Group said, at a time when inventories would be approaching operationally critical levels.

Even if the strait were reopened at the beginning of August, markets would continue to face shortages before conditions improve. According to Rapidan Energy Group, crude oil inventories would keep falling in September while production in Gulf states gradually recovers and shipments begin reaching their destinations.

Background: The world has lost more than US$50 billion worth of crude oil production in the first 50 days since the war with Iran began. Analysts warn that the consequences of the crisis are likely to be felt for months, if not years.

Support Ukrainska Pravda on Patreon!