High oil prices are "killing demand": The impact erupts from Asia
Affected by rumors of potential US-Iran negotiations, Brent crude oil prices have temporarily lost upward momentum and fell back to $96. However, supply-side tensions have not eased: oil flows through the Strait of Hormuz remain more than 95% below normal levels, and the oil flow gap across the Persian Gulf has expanded to 17.7 million barrels per day. Meanwhile, demand-side pressure is accelerating.
Refining capacity has suffered heavy losses, gasoline prices are climbing rapidly, and demand destruction is spreading from Asia. Multiple airlines have cut flights due to rising fuel costs, several Asian countries have implemented work-from-home policies to manage road fuel consumption, and economies such as South Korea have issued bans or price controls on exports of gasoline, jet fuel, and diesel. Analysts warn that if supply chains do not recover within days, demand destruction will quickly spread to Europe and the rest of the world.
On the supply side, Trump recently commented on the possibility of US-Iran talks, and rumors of a ceasefire agreement have put downward pressure on oil prices. According to CCTV News, Iran’s Khatam al-Anbiya Central Command spokesperson directly addressed the US on the 25th, saying: "Americans are negotiating with themselves—don’t call your failure an agreement."
Although Iran officially denies contact with the US, Israel has confirmed there has been indirect communication, temporarily easing market pricing for lasting supply disruption risks. Goldman Sachs currently expects the interruption of oil flows through the Strait of Hormuz to persist until April 10.
With supply and demand pressures intertwined, the "bite-back" of high oil prices on demand is evolving from a regional phenomenon into a global challenge.
Demand Destruction: Asia Bears the Brunt as Spillover Risks Rise
The cumulative effects of supply chain shocks are rapidly turning into substantial demand destruction. Jet fuel and diesel prices have surged, distinctly suppressing end consumption. Several airlines have announced flight cuts, and some Asian policymakers are pushing for broader work-from-home arrangements to ease road fuel demand pressures.
On the policy response front, South Korea has set price caps on gasoline and diesel to protect domestic consumers from wholesale price spikes. Multiple European countries have also introduced export restrictions on certain oil products.
Analysts point out that demand destruction is still in its early stages and concentrated in Asia. If supply chains do not return to normal within days rather than weeks, these effects will quickly spill over to Europe and eventually affect other regions globally. Historical experience shows that once product oil shortages trigger a chain reaction, repair periods are often much longer than initially expected.
Energy Shock Spreads Outwards, Markets Reassess Inflation Risks
Energy shocks are now affecting broader asset classes. The correlation between oil prices, US Treasury yields, and breakeven inflation rates is tightening again. Markets are rapidly repricing for a "second wave of inflation" rather than downplaying it.
On the interest rate market, if the US 10-year Treasury yield breaks above 4.4%, the situation will no longer be confined to interest rates but will evolve into systemic pressure across stocks, credit, exchange rates, and other assets. At present, the stock market’s pricing of this risk remains inadequate.
Emerging markets are facing a triple hit from oil prices, interest rates, and volatility. EEM (Emerging Markets ETF) is testing a key trend support line, and the emerging markets volatility index VXEEM is climbing rapidly. Once support breaks, selling pressure may accelerate rather than ease.
Supply-Side Pressures Unresolved, Offshore Oil Storage Nears Limit
The situation in the Strait of Hormuz remains grim, continuing to support high oil prices. In recent days, an average of only about 2 oil tankers per day passed through the strait, and oil flows are down 95% from normal, though there has been a slight recovery lately. US officials confirm Iranian mines remain distributed in the waters, posing a persistent shipping threat.
Broader Persian Gulf flow data is equally severe. Including rerouting through Yanbu and Fujairah ports, the loss in Persian Gulf oil flows (4-day moving average) has expanded to 17.7 million barrels per day. Flows through the strait are 98% below normal, at only about 400,000 barrels per day, with pipeline rerouting adding about 1.9 million barrels per day in net supplementation.
Meanwhile, offshore floating oil storage from the Persian Gulf has increased by 74 million barrels since February 27, approaching the estimated shipboard storage limit at that time, indicating that maritime storage space for Gulf oil producers is tightening. If supply-side pressure further transmits downstream, it will add new variables to the refined oil product market already enduring demand destruction.
Refinery Facilities Become Main Targets, Refined Oil Supply Troubles Persist
Supply-side pressures have extended from crude oil to refined oil products. The International Energy Agency (IEA) estimates that since the outbreak of this round of conflict, at least 40 energy assets in the Middle East have suffered serious damage. Notably, the substantial damage is currently focused on refinery facilities, not crude oil production; the latter has mostly seen precautionary shutdowns.
One example: Kuwait’s Mina Al-Ahmadi refinery was attacked last Friday. Based on this, Goldman Sachs has raised its estimate of Middle East refinery capacity disruptions to 2.3 million barrels per day. Sustained losses in refinery capacity mean that even if crude oil output remains stable, tight refined oil supply will persist.
In the past two days, attacks on energy assets have somewhat subsided, but Israel and the US previously struck natural gas facilities in Iran’s Isfahan province; concerns about a new round of actions have not dissipated, and risk premiums for Gulf energy infrastructure remain high.
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