Oil market faces demand destruction despite Middle East peace hopes

U.S. President Donald Trump says he’ll end the war within weeks, but fears for oil supply and demand destruction are set to linger.

In an address on Wednesday evening, Trump said he expected the war to last another two to three weeks, during which time U.S. forces will “hit” Iran “extremely hard.”

The timescale was a reiteration of what Trump had said the previous day, when he told reporters at the White House that the Iran war would end within weeks “whether we have a deal or not.”

Oil prices have skyrocketed since the U.S. and Israel launched strikes on Iran on Feb. 28, sparking retaliatory strikes across the Gulf from Tehran and the effective closure of the Strait of Hormuz.

The closure of the critical shipping route contributed to global benchmark Brent crude oil prices surging more than 60% over the course of March, marking the biggest monthly price gain since records began in the 1980s.

In the wake of Trump’s 19-minute speech on Wednesday, oil prices soared as analysts noted U.S. troops and aircraft continued to arrive in the Middle East, casting doubt over Trump’s insistence the conflict is drawing to a close.

Global benchmark Brent crude was last seen trading more than 6.5% higher at around $107.79 per barrel around 11:00 a.m. in London, while U.S. West Texas Intermediate crude oil added around 6% to settle at just over $106 a barrel.

There are fears that a prolonged conflict could lead to demand destruction — a sustained drop in demand brought on by high prices or limited supply. The decline in demand can push consumers to reduce their consumption of specific goods, like gasoline, or seek out alternatives, like electric or more fuel-efficient vehicles.

“If Middle East oil exports were to remain low for longer, we see potential for significant price-driven reductions in demand for gasoline and diesel in the largest markets with flexible prices (e.g. US) and emerging markets where prices have risen sharply and fuel demand is likely relatively price-sensitive (e.g. South Africa, Philippines, Malaysia, Vietnam),” analysts at Goldman Sachs said in a note on Tuesday.

“Pockets of clearer demand destruction have emerged in certain markets, including in aviation and Asian petrochemical industries,” they added.  

Some officials and market watchers have warned that markets have not fully priced how long it will take to bring oil supplies back up to speed, given the backlog of traffic in the Strait of Hormuz and the destruction and closure of energy facilities in the Middle East.

In an interview with The Economist last week, European Central Bank chief Christine Lagarde labeled market views of a swift recovery from the Iran war “overly optimistic,” telling the publication that there is “no way” the Gulf’s lost energy supply can be…