The oil market's "buffer zone" is on the verge of depletion: If the Middle East war continues, the destruction of 8 million barrels of demand per day may become the only way out.

As the military conflict between the United States, Israel, and Iran enters its thirty-first day, the global challenge of a shortage in crude oil supply is gradually becoming apparent. Despite measures such as utilizing pipelines that bypass the Strait of Hormuz and releasing strategic reserves providing some cushion, unless this military conflict ends soon, crude oil consumption will need to adjust to a situation of reduced supply, or even significantly reduced supply, which will signify the arrival of the "demand destruction" phase in the crude oil market. So far, the market has been relatively good at digesting the shortage in crude oil supply. Despite alarmist media headlines, the benchmark Brent crude oil prices are still far below the levels of $130 to $150 reached during previous crises. As of the time of writing, Brent crude oil futures prices have risen by over 2%, reaching $107.55 per barrel. This relatively mild reaction does not mean that the market is not reacting enough to the closure of the Strait of Hormuz, which carries about one-fifth of the global crude oil transportation task. On the contrary, this indicates that the multiple layers of defense mechanisms in the supply system have played a temporary buffering role in this ongoing month-long impact. Previous crises have typically lasted for several months or even years. However, the gap between supply and demand is so large that these defense measures will eventually be exhausted. The last time the market experienced such a severe imbalance was during the 2020 pandemic when billions of people were forced to stay at home. But at that time, the issue was oversupply, whereas this time it is the opposite. Oil prices at a high level but not at a historic high At the beginning of this war outbreak, the closure of the Strait of Hormuz meant an immediate loss of about 20 million barrels of crude oil and oil product supply per day. The energy industry quickly activated its first layer of defense: utilizing inventories. The second layer of defense was then activated - Saudi Arabia and the United Arab Emirates redirected some exports through alternative pipelines to ports in the Red Sea and the Arabian Gulf. The third layer of defense comes from the political level. Wealthy countries tapped into strategic reserves and injected millions of barrels of crude oil into the market. US President Trump also made continuous and effective verbal interventions, helping to suppress panic-buying sentiment with his statements about the possibility of the war ending. It is difficult to assess the contribution of these measures individually. Some measures (such as redirecting pipelines) constitute permanent adjustments, while others (such as utilizing inventories) are temporary. A rough estimation shows that under relatively loose assumptions, these measures combined may offset about 60% of the supply loss - roughly 12 million barrels per day. However, the massive gap still exists. If the war continues and reserves continue to be depleted, this gap will widen. Without new sources of supply, the only way to solve this problem is through the fourth layer of defense in the market, which is also the most radical - demand destruction. Demand destruction refers to policymakers using emergency tools to restrict energy consumption (a milder way), or high prices forcing consumers to stop purchasing (more severe, as it will impact the economy). This phase may be inevitable. Paola Rodriguez-Masiu, Chief Oil Analyst at consulting firm Rystad Energy, stated, "the system has transitioned from having buffers to being fragile." How fragile is it? Probably very serious. If calculations are correct, the market needs to "destroy" at least about 8 million barrels per day of demand. This scale exceeds the total consumption of Germany, France, the UK, Italy, and Spain combined. The more ideal approach would be for governments to implement measures to cut crude oil consumption to a certain extent. While painful, these measures would have less impact on economic activity. For example: lowering highway speed limits, reducing heating and air conditioning usage, enforcing work-from-home to reduce commuting energy consumption. However, these measures are controversial at both political and economic levels. The International Energy Agency (IEA) has already recommended similar measures, but major developed countries have not implemented them yet for fear of public backlash. In developing countries, including Pakistan, the Philippines, Vietnam, and Thailand, have already started to take similar actions. More countries are expected to follow suit unless the war ends soon. Unfortunately, in an energy crisis that shows no signs of ending, policymakers have limited management capacity for demand destruction. Ultimately, soaring prices will play a significant role, with a highly uneven distribution of impacts. In some regions of Africa, Southwest Asia, and Southeast Asia, oil prices have already risen to levels sufficient to suppress demand, thereby dragging down economic activity. Local chemical plants and fertilizer factories are closing down. Poorer countries will be squeezed out of the market by wealthier countries or those capable of subsidizing fuel prices and implementing export bans. In terms of consumption structure, the United States, Canada, Europe, Japan, and China collectively account for nearly 55% of global crude oil consumption. This means that about 60% of global crude oil consumption is concentrated in regions that typically have the ability to pay. Therefore, the initial demand destruction will mainly occur in regions that cannot afford high oil prices - centered in most parts of Africa, Latin America, and most parts of Asia. In the coming weeks, if the war continues, gas stations may run out of supply, and factories may be forced to shut down. If the war lasts for months rather than weeks, these measures will no longer be sufficient. By then, the pressure will shift to areas that consume the most crude oil.