Demand destruction is a phrase we haven’t heard for some years. But it is happening everywhere today.
Oil refiners are now making record profits due to Hormuz/Russia-related shortages of diesel, gasoline and other fuels, as the Bloomberg chart shows,:
- The Hormuz War has caused supplies of oil, fuels and LNG to tumble
- Inevitably, this has led to higher prices down the major value chains
- Ukraine’s attacks on Russian refineries have further reduced output
- Russia has now stopped exporting diesel to protect domestic supplies
At the same time, the AI bubble has turbocharged memory and semiconductor prices.
The combined impact meant global smartphone sales tumbled 11% in Q2 and are back to 2013 levels.
OIL INVENTORIES ARE AT DANGEROUSLY LOW LEVELS
Unfortunately, things seem to be getting worse, not better.
Oil markets are now starting to run out of inventory as the second Bloomberg chart confirms:
“A steady decline in global oil inventories will make it progressively harder to maintain the (Iran) blockade. The US drew heavily from its strategic reserve during the early stages of the war in Ukraine, and total stocks (controlled by both public and private sectors) are at depths unseen since 1984.”
TRANSITS THROUGH THE STRAIT ARE SEEING MAJOR DECLINE
The experts on the weekly Lloyds List Intelligence webinar were markedly more pessimistic last week:
“The security environment in the Strait of Hormuz and the wider Gulf has deteriorated sharply. We are now back to conditions that resemble the most intense phase of the crisis with one important difference:
- Military operations are expanding across the Gulf
- They are targeting military assets and creating risks to critical energy infrastructure”
As the Bloomberg chart shows, outbound transits have collapsed again. This creates a major problem:
- Almost all the major plants are now shutdown due to lack of storage
- Ships stuck in the Gulf therefore have first to leave to discharge their cargoes
- New ships then have to arrive to empty the plant’s storage tanks
- Only then can manufacturing managers decide if a restart is possible
As anyone who has worked in the oil and chemical industry knows, restarts have to be very carefully managed due to the risk of explosions.
Last month’s Ras Laffan explosion was a tragic reminder of the risks involved.
THE CLOSURE IS ALSO HELPING TO CREATE A MEMORY SHORTAGE
The Ras Laffan site is also the world’s largest helium supplier, as we noted back in March.
And helium is, of course, critical for semi-conductor manufacture.
And so the lack of helium adds to the massive shortages created by the hyper-scalers as they rush to build out AI capacity:
- This has already collapsed the lower end of the smartphone market
- Xiaomi had to absorb a massive 20% to 30% bill-of-materials cost surge on low-end units
- To survive, it aggressively reduced sub-$150 shipments
- Apple is next in line to suffer as CEO Tim Cook warned:
“I’ve never seen anything like it in any area in over 40 years. Unfortunately, price increases are unavoidable”
Neo prices are set to rise by $100; iPod Air prices rise $150, the iPad Pro and Macbook Air rise $200; the Macbook Pro rises $300; and the Mac Studio rises $400.
Apple’s price rises highlight demand destruction in action. Suddenly, prices are going up, not down.
The longer the wars and the AI bubble continue, the more prices and inflation will rise as supplies reduce.