‘Demand destruction has begun’
JP Morgan has released an insightful note addressing the theme of demand destruction amid the ongoing oil market crisis, particularly focusing on the economic impact in Asia. Their analysis highlights:
"Diesel has emerged as the region’s immediate choke point, with surging prices slowing both travel and freight. Governments are responding with a mix of demand management and emergency measures. Bangladesh brought forward the Eid-al-Fitr holiday and allowed universities to close early to save fuel. The Philippines and Sri Lanka instituted four‑day workweeks to curb diesel use and stretch dwindling stocks. Pakistan closed schools and shifted universities online. Officials in Thailand and Vietnam have been urged to use stairs, work from home, and limit travel, while Myanmar introduced alternating driving days to reduce road fuel demand. In parallel, authorities are intervening directly into fuel markets to stabilize fuel prices.
As jet fuel approaches $200 per barrel, carriers are shifting from cost management strategies to outright service withdrawal, with many routes becoming uneconomic.
In numerous regions, demand reduction is not voluntary but results from the physical absence of inputs.
Oil demand is generally highly inelastic in the short term because most end uses have few immediate substitutes—factory boilers rely on fuel oil, aircraft require jet fuel, and most cars still run on gasoline.
World’s energy watchdog advises emergency measures as oil prices rise
The International Energy Agency (IEA), the global energy watchdog, has urged governments to implement emergency measures to mitigate soaring oil prices and potential fuel shortages triggered by the Middle East conflict.
Recommendations include reducing highway speed limits, encouraging carpooling, and promoting remote work where possible. The IEA also suggests that countries consider restricting car access in major cities by alternating vehicle use based on odd or even-numbered license plates on different weekdays.
Member countries such as Australia, the UK, and the US have been advised to adopt these measures following military strikes on Iran that have caused significant supply disruptions in the global oil market.
UK borrowing jumps to over £14bn in February
New data reveals that the UK government’s borrowing exceeded expectations in February.
The gap between total public sector spending and income widened by £2.2 billion year-on-year to £14.3 billion, surpassing the City’s forecast of an £8.5 billion deficit for the month.
This figure represents the second-highest February borrowing since monthly records began in 1993, only behind the February 2021 figure during the Covid-19 pandemic.
This increase follows a record surplus in January, which was driven by a surge in tax receipts.
After 11 months of the financial year, borrowing is 8.7% lower than in the same period last year.
Tom Davies, senior statistician at the Office for National Statistics (ONS), commented:
"Borrowing was higher than the same month last year and was the second-highest February figure on record. While receipts were up on last year, that was outweighed by a rise in spending, including the later timing of some debt interest payments.However, across the first eleven months of this financial year as a whole, borrowing was down, as receipts increased by more than spending."
Introduction: Demand destruction fears rise after Iran war drove up oil and gas prices
Welcome to our continuous coverage of business, financial markets, and the global economy.
Three weeks into the war, investors and analysts are increasingly concerned about the possibility of ‘demand destruction’ in the world economy.
The recent surge in oil and gas prices, driven by reduced supply from the Middle East and attacks on production facilities, follows a clear economic principle: when supply is limited, prices rise until demand decreases.
This reality has been underscored by attacks on Iran’s vast South Pars gas field and QatarEnergy’s large LNG production site.
Signs of demand destruction are already evident, particularly among energy-importing countries.
For instance, Egypt has begun reducing electricity consumption by ordering shops and cafes to close earlier.
India, which has experienced a decline in fuel imports this month, has directed refineries to maximize LPG production for household use and prioritize supplies for hospitals and educational institutions, leaving businesses struggling.
Although oil and gas prices have slightly decreased this morning, Brent crude remains above $100 per barrel.
Jet fuel prices have also risen sharply this month, prompting forecasts that airlines will increase fares, suppressing demand, or even reduce routes.
Stephen Innes, managing partner at SPI Asset Management, notes that oil is now "dictating the tempo of global activity." He explains:
"Asia is the first to blink, as it always is when the energy complex starts to bite. Japan’s petrochemical sector is already throttling back, not as a strategic choice but as a forced response to feedstock scarcity and elevated costs. Ethylene runs are being cut, restarts delayed, and the entire chain is starting to behave like a machine that no longer trusts its fuel supply. South Korea is moving down the same path, with major producers stepping back from full capacity and even invoking force majeure, which in market language is less a legal term and more a flare shot into the sky signaling that the system is under stress. When governments begin labeling inputs like naphtha as economic security items, you know the conversation has shifted from price discovery to resource preservation.
China, which typically absorbs shocks through scale and policy support, is not immune. Refinery runs are being reduced to conserve crude, not due to booming demand but because supply certainty has vanished. Downstream, petrochemical operations are shutting units and suspending deliveries, effectively withdrawing liquidity from the physical market. This exemplifies demand destruction in real time.
The agenda
- 7am GMT: UK public sector finances for February
- 9:45am GMT: Speech by FCA CEO Nikhil Rathi at JP Morgan Pensions and Savings Symposium
- 10:30am GMT: Bank of Russia interest rate decision
- 11am GMT: CBI Industrial Trends report
