We are now 8 weeks into the Iran War. And the IMF is warning on inflation and recession risks, as the chart shows:
- Its Reference Case was based on a short, sharp shock – and still saw inflation averaging 4.4% and global growth falling to 3.1%
- But that is clearly no longer realistic: The Pentagon has warned it “could take 6 months to clear mines” that have been laid in the Strait, before ships can pass
- So we are really now faced with its Severe case – which sees inflation averaging 5.8% and global growth of just 2%
- As the Wall Street Journal warns, global growth of just 2% is only seen “during the deepest global recessions”
IT IS IMPOSSIBLE TO REPLACE THE LOST OIL & GAS OUTPUT
Renewables in the form of wind, water and solar have seen major growth in recent years:
- But as the IMF chart shows, they are still only ~15% of global energy
- By comparison, oil and gas combined are ~55% of global energy
- And the Hormuz closure means we are now losing 20% of that volume
In terms of oil supply, as the IEA conclude in their new monthly Report:
“In early April, shipments through the Strait remained severely restricted, with loadings of crude, natural gas liquids and refined products averaging around 3.8 mb/d, compared with more than 20 mb/d in February ahead of the crisis. The overall loss in oil exports exceeds 13 mb/d.” (our emphasis)
STRAIT OF HORMUZ REMAINS CLOSED WITH FEW SHIPS TRANSITING
Today’s energy crisis is essentially unfolding in slow motion. Asia was early to feel the impact, as it is closest to the Strait.
Longer sailing times to Europe and N America mean they are only now beginning to feel the full impact of the its closure:
But now, the flow of oil and gas through the Strait has more or less stopped, as the Lloyds List chart confirms.
Another mitigating factor was the availability of sanctioned Iranian and Russian oil.
This was in ‘floating storage’, having been loaded onto ships to allow the oil wells to keep operating. But it is now being used up.
INVENTORIES WILL SOON BE AT ALL-TIME LOWS
Strategic reserves are there to avoid short-term problems from weather, strikes and other “events”. They can’t compensate for a major long-term loss of supply:
- Today, total visible oil inventory is declining, as the Goldman Sachs chart shows
- It is being drawn down at a rate of 10.9mb/d
There will soon be no more inventory to draw down. At that point, demand destruction becomes inevitable.
THE WORLD HAS BEEN HERE BEFORE, BUT NOT FOR 50 YEARS
The key issue is that it has been a long time since the West has suffered a major energy shortage. The last time was in 1974:
- The UK went on a 3-day week in January 1974 as the Daily Mail headline confirms
- The USA saw gasoline outages at service stations, and hours-long lines at open stations
Today, we risk new shortages developing across the world.
FERTILIZER AND FOOD SHORTAGES ARE ALSO BECOMING INEVITABLE
Countries dependent on Gulf fertilizer shipments are already suffering a massive shortfall as the UNCTAD chart shows, and food costs are starting to soar.
HIGHER INTEREST RATES AND THE LOSS OF HELIUM CREATE STOCK MARKET RISK
Western financial markets face different, but equally alarming risks:
- AI-related companies are now 45% of the US S&P 500 Index, as the Goldman Sachs chart confirms
- And Goldman expect just one company, Nvidia, to be 45% of US S&P 500 earnings growth in 2026
Yet as we noted in March, QatarEnergy supplies 34% of the world’s helium, which is critical for semiconductor manufacture.
It shutdown on 4 March. 17% of its capacity was then destroyed by missiles on 18/19 March. Repairs will take ~4 years.
Unsurprisingly, the IMF is now warning that:
“Heightened macro risks and the prospect of tighter monetary policy could trigger a sudden repricing by financial markets—with much lower asset valuations, higher risk premia, more capital flight, and dollar appreciation”.