Demand destruction now seems inevitable as the Gulf War moves into its 6th month. Iran clearly believes it is winning the War, and is starting to expand its war aims:
- Initially, its 3 main aims were to control the Strait of Hormuz, end the US blockade and end sanctions
- Its proposed new deal with Oman moves it closer to achieving the first objective
- As the map shows, both Iran and Oman will control routes in their own territorial waters
- Reuters reports the deal includes proposed new toll fees of 5%-7% of cargo value – $5/bbl
Iran is also now moving from defence to offence as defence to offence as it confirmed at the weekend:
- The new Hormuz deal aims to ban US and Israeli ships from using the Strait
- This is clearly a bargaining chip to achieve its other objectives
- It is also using the Houthis to reduce Red Sea movements and pressure Saudi Arabia
As Reuters reports, its strategy means that:
“Trump is caught between an emerging interim deal being negotiated by Iran and Oman that would give Tehran control over the Strait of Hormuz it never possessed before the war, or following through on his warnings of sharp escalation, risking a more prolonged crisis.”
Demand destruction is therefore becoming inevitable as we move into the autumn. Transport fuels – gasoline, diesel, jet and bunker fuel – are most at risk, in terms of price hikes and shortages.
THE WORLD HAS ALREADY LOST 2.6BN BARRELS OF OIL
We are now in the 6th month of the War and the pressure is mounting on oil supplies and oil suppliers:
- Saudi Aramco CEO, Amin Nasser, warned last week that the world has lost 1 month’s oil supplies
- He added that it would take up to 18 months to replace lost inventory
- As the Reuters chart shows, Saudi GDP fell 4.8% in Q2 as hydrocarbon output fell 25%
Overall, Middle East oil output is now less than half its prewar volume, as the second Reuters chart confirms.
Last week, it was just 6.2mbd versus 20mbd before the War
SHIPPING ASSOCIATIONS WARN STRAIT OF MALACCA COULD BE A TARGET
Shipping companies are increasingly worried that Iran will end up in control of the Strait.
They fear this would lead to other countries taking control of their own chokepoints, as the Lloyds List Intelligence chart shows for the Strait of Malacca. As Bloomberg report:
“Eight of the world’s largest shipping industry associations urged the United Nations and International Maritime Organization to oppose any compulsory tolls or transit charges in the Strait of Hormuz, warning that such a move could set a precedent for similar fees at other key maritime choke points.”
As they note, President Trump seemed to give the green light to such a move when he talked about the US charging a 20% toll if it took control of Hormuz.
US INVENTORIES ARE GETTING CLOSER TO TANK BOTTOMS
In the meantime, global oil and product inventories are heading towards record lows as the HFI Research chart shows:
- Normally, this would have moved oil markets into contango, where future prices are higher than today
- This would encourage players to increase drilling and store oil for the winter
- But the White House has been determined to keep prices below $100/bbl
- Whenever future prices moved above $100/bbl, it announced new talks – and prices fell back again
But, of course, this tactic has only deferred the problem.
US IS RUNNING OUT OF SHORT-RANGE MISSILES
A new problem has also now emerged over the past week. It seems the US is running out of short-range missiles, as the interview with Lt General Mark Hertling suggests.
Before the War, the Washington Post had already reported that the Chairman of the Joint Chiefs of Staff, General Caine:
“Had cautioned President Donald Trump and other officials that shortfalls in critical munitions and a lack of support from allies will add significant risk to the operation and to U.S. personnel, according to people familiar with internal discussions”.
Defense Secretary Hegseth told Congress last month there was an “urgent, necessary” need to rebuild stockpiles.
USA COULD STOP FUEL EXPORTS TO PROTECT DOMESTIC MARKET
Two conclusions stand out from the above evidence:
- The USA/Israel are finding it very difficult to defeat Iran. Oil inventories are coming close to tank bottoms, and military supplies of crucial short-range missiles seem to be running low
- Demand destruction is already underway in Asia. Poorer countries cannot afford today’s prices. The West now risks shortages of gasoline, diesel, bunker and jet fuel as we move into the autumn
This problem has been deferred by US refiners ramping up fuels production. They have been the ‘supplier of last resort’ for these products in recent months, as the Bloomberg chart confirms for diesel:
“The US shipped a record amount of distillate fuel overseas last week as domestic stockpiles fell again, the latest sign that the global scramble for diesel is increasingly draining US supplies.”
The question is whether the White House will allow these exports to continue as the US mid-term elections approach? Will it ban exports to protect the domestic market?