Trump sets Iran timeline as oil faces demand destruction

In an address on Wednesday evening, Trump said he expected the war to last another two to three weeks, during which time U.S. forces will “hit” Iran “extremely hard.”

The timescale was a reiteration of what Trump had said the previous day, when he told reporters at the White House that the Iran war would end within weeks “whether we have a deal or not.”

Oil prices have skyrocketed since the U.S. and Israel launched strikes on Iran on Feb. 28, sparking retaliatory strikes across the Gulf from Tehran and the effective closure of the Strait of Hormuz.

The closure of the critical shipping route contributed to global benchmark Brent crude oil prices surging more than 60% over the course of March, marking the biggest monthly price gain since records began in the 1980s.

In the wake of Trump’s 19-minute speech on Wednesday, oil prices soared as analysts noted U.S. troops and aircraft continued to arrive in the Middle East, casting doubt over Trump’s insistence the conflict is drawing to a close.

Global benchmark Brent crude was last seen trading more than 6.5% higher at around $107.79 per barrel around 11:00 a.m. in London, while U.S. West Texas Intermediate crude oil added around 6% to settle at just over $106 a barrel.

There are fears that a prolonged conflict could lead to demand destruction — a sustained drop in demand brought on by high prices or limited supply. The decline in demand can push consumers to reduce their consumption of specific goods, like gasoline, or seek out alternatives, like electric or more fuel-efficient vehicles.

“If Middle East oil exports were to remain low for longer, we see potential for significant price-driven reductions in demand for gasoline and diesel in the largest markets with flexible prices (e.g. US) and emerging markets where prices have risen sharply and fuel demand is likely relatively price-sensitive (e.g. South Africa, Philippines, Malaysia, Vietnam),” analysts at Goldman Sachs said in a note on Tuesday.

“Pockets of clearer demand destruction have emerged in certain markets, including in aviation and Asian petrochemical industries,” they added.  

Some officials and market watchers have warned that markets have not fully priced how long it will take to bring oil supplies back up to speed, given the backlog of traffic in the Strait of Hormuz and the destruction and closure of energy facilities in the Middle East.

In an interview with The Economist last week, European Central Bank chief Christine Lagarde labeled market views of a swift recovery from the Iran war “overly optimistic,” telling the publication that there is “no way” the Gulf’s lost energy supply can be restored within months. The disruption may last years, she warned.

Scott Shelton, an energy analyst at TP ICAP, told CNBC that at current rates, he expects overall losses for the duration of the war so far to be around 500 million barrels of crude oil and refined products like diesel, jet fuel and gasoline.

This, he added, would wipe out the storage buffer that existed before the war started — with signs of demand destruction already emerging in pockets of the market, such as petrochemical products and gasoline in Asia.

“If [the war] ends in two to three weeks and the Strait of Hormuz reopens, I think we will have enough oil to survive this shock to oil prices,” he said. “If Trump can guarantee this ends in 2-3 weeks, I would think we don’t need to go to levels where demand losses are equal to supply losses. That being said, how does he actually achieve that to the extent that the oil market will be comfortable enough to not take them there?”

Last week, Trump paused U.S. attacks on Iranian energy facilities until April 6.

Shelton told CNBC that “if this war is still going past the weekend’s ceasefire, we are going to demand destruction levels before the middle to end of the month.”

Simon Evenett, Professor of Geopolitics and Strategy at Switzerland’s IMD Business School, said that despite Trump’s vow to “finish the job” in Iran, he “has no viable military strategy to neutralize Iran’s enduring threat.”

“The Gulf conflict looks set to extend well beyond three weeks,” Evenett told CNBC in an email. “Even if the United States withdraws, Iran can continue the fight. Claims that Tehran’s capabilities have been obliterated are overstated. Iran can sustain a stranglehold on the Strait of Hormuz. Oil prices would rise sharply. Physical shortages will emerge. Demand destruction becomes a necessity.”

This is because substantial price increases will be required to push consumption down to meet reduced supply, he explained.

“Brace yourselves for the next phase of disruption,” Evenett warned.

Chris Metcalfe, chief investment officer at asset management firm IBOSS, told CNBC that markets were not yet seeing true demand destruction, but rather “short-term demand modification driven by higher prices and precautionary behaviour.”

“The experience in the United States, where gasoline prices briefly moved above $4 per gallon, is a good example. Such price levels can alter behaviour, but unless they are sustained, the impact tends to be short-lived and reversible,” he said.

Metcalfe also pointed to South Korea and Thailand as examples of markets where consumption has softened, but said this was reflective of temporary adjustments rather than structural declines.

“If there is credible visibility on the endgame and timing of the conflict, it is unlikely that we will see significant or lasting demand destruction,” he said. “Ultimately, duration of elevated prices, rather than short-term spikes, will determine whether temporary adjustments evolve into more structural changes in demand.”

This week, Germany brought in new regulations to stop gas stations from hiking fuel prices more than once a day, with the government claiming some outlets had been raising prices 22 times daily.

Australia’s government has rolled out a national fuel security plan with four status levels that command differing responses. Under the current status — level 2 of 4 in the plan — drivers are being encouraged to “only buy the fuel you need.”

In Japan, rules are being temporarily relaxed to allow increased use of coal-fired plants.

This week, Fatih Birol, head of the International Energy Agency, told the “In Good Company” podcast that the current energy crisis had already become the largest in history.

The IEA itself has already taken steps to alleviate some of the supply pressure in the market, publishing a list of recommendations the public and governments can take to reduce energy usage and releasing a record 400 million barrels of oil from its emergency stockpiles.

“In many countries, the rationing of energy may be coming soon,” Birol warned during his podcast interview.

Toni Meadows, head of investment at BRI Wealth Management, told CNBC that energy rationing announcements are likely by the end of the two-to-three-week period Trump laid out on Wednesday.

“I would expect to see more announcements regarding potential rationing of oil supplies as countries prepare for a period where their reserves start to deplete. Oil prices and crucially pump prices would rise further if there were no end in sight,” he said in an email.

Meadows said he expects to see imminent changes in consumer behavior as fuel costs tick higher, such as long lines at gas stations that maintain cheaper prices.

“If the war lasts longer than 3 weeks, demand will be under pressure and could be postponed, but at this stage it’s not destroyed, so if the war ends quickly, it comes back,” Meadows added, noting that demand would only be destroyed by a longer-term disruption to the Strait of Hormuz that caused lasting inflation.

“Higher prices eventually lead to a spiral that destroys demand in a repetitive cycle until there is enough spare capacity (unemployment) and low interest rates to allow demand to come back without causing higher prices,” he said. “But this will not happen over the next 3 weeks.”