Oil futures traders tend to be optimistic. On April 17, after Iran’s foreign minister declared that the Strait of Hormuz was “fully open,” the price of Brent crude fell 10% to $90 a barrel.

Within hours, Iran changed tack and attacked an Indian tanker. The next trading day, the global benchmark rose by just 5%.

Since then, the price has risen sharply to above $126 a barrel, surpassing its peak in late March, even as a US blockade has stopped more oil from flowing into the Persian Gulf. A few days later, oil fell back below $100 on news of a possible deal.

More than fifty days after the start of the war with Iran, the world has lost 550 million barrels of crude oil from the Persian Gulf, nearly 2% of last year's global production. For every month that Hormuz remains closed, the world is missing 7 million tons of liquefied natural gas (LNG), worth 2% of annual supply.

However, in Western countries, where the largest futures markets are located, the impact remains limited.

Gasoline is a little more expensive, but most families can still afford to drive. Trucks keep rolling. Planes keep flying. Fuel reserves remain near pre-war levels.

This reassuring picture is deeply disorienting. By April 20, the few oil tankers that had passed through Hormuz before the war began had reached their destinations, in Malaysia and California.

There is no longer any buffer left to protect the world from a supply shock, at a time of year when demand from holidaymakers is starting to rise.

To gauge how close the world is to energy catastrophe, The Economist has studied a set of indicators. It shows that serious damage has already been done.

Worse, without a reopening, costs could skyrocket, triggering events that could paralyze the fuel system. Reopening the strait now would narrowly avert disaster. But some of the additional negative impact is already inevitable.

Three factors are pushing the world to the brink of collapse. Oil supplies available for purchase are falling sharply. Refineries are cutting fuel production.

And demand remains artificially high, especially in Europe. For energy markets to balance, something significant has to happen somewhere in a major market.

First, trade. One reason the biggest supply shock in oil history hasn't caused a global panic is that a near-record amount of oil was at sea when the war began. As US warships headed for the Persian Gulf in February, countries in the region increased exports.

After the latest shipments, these additional reserves at sea have been depleted. So have most of the Iranian and Russian oil cargoes, which were waiting at sea but found buyers after America eased sanctions on the two countries.

Total volumes at sea have fallen at a record pace. For jet fuel and gasoline, they are well below historical rates and probably close to the minimum needed for maritime trade to function (see chart 1, top panel).

That leaves Asia, which once accounted for four-fifths of Gulf exports, in a particularly difficult position. Trade inventories in several other Asian countries are falling sharply. South Korea is expected to cut its releases from its strategic stockpile in the coming days.

Japan's will run out in May. Crude oil reserves in Asia, excluding China, fell by 67 million barrels, or 11%, in the month to April 19, according to Kayrros, a company that estimates inventories through satellite imagery.

The shortage of raw material has forced Asian refineries to reduce processing by over 3 million barrels per day, or 10% of their combined capacity.

That could accelerate to 5 million barrels a day in May and, if the strait remains closed, to 10 million barrels a day in July, says Neil Crosby of Sparta Commodities, a data firm. China could help by releasing some of the 1.3 billion barrels of crude it holds in reserve.

Instead, it has suspended exports of refined products. A trader familiar with its energy strategy thinks it will not turn on the taps before a lasting ceasefire.

All of this exacerbates the shortages created by the loss of Gulf exports of finished fuels, on which Asia also depends.

Refined fuel prices are already high. In current trading markets in Asia, gasoline is approaching $120 a barrel, diesel $175, and jet fuel $200, up from $80, $93, and $94, respectively, before the war.

Demand is being matched, in part, by government decisions. Seven countries have mandated work from home and at least five are rationing fuel for vehicles.

High prices are also taking their toll. Small mines, fishing boats and other companies without sufficient oil reserves are working part-time. Faced with the inability to afford the price of light oil, some plastics manufacturers have closed production units.

The combination of state and self-imposed rationing could cause Asian demand for crude oil to shrink by nearly 3 million barrels per day in April, compared with February.

Europe has so far avoided a sharp decline in demand as governments try to preserve citizens' purchasing power. Of the 27 European Union countries, 16 are using taxpayer money or cutting fuel taxes to shield consumers from higher prices.

For this reason, European refiners have hardly cut production. But, like their Asian counterparts, they too must buy crude oil at a much higher cost than Brent futures contracts suggest.

A better gauge is dated Brent, the price for actual cargoes to be delivered in the coming weeks. The spread between the two, usually $1 to $2, widened sharply in April, reflecting fears of near-term shortages, according to Platts, which compiles the benchmark (see chart 1, bottom panel).

It has since narrowed, but remains larger than usual and does not include high shipping fees and other costs.

Crude oil at $130 to $150 per barrel has pushed European refiners' margins into negative territory, estimates Benedict George of Argus Media, a price reporting agency (see chart 2, top panel).

Extreme backwardation, the situation where current commodity prices are much higher than futures prices, reduces their profits: they have to pay a high price for crude oil now, but sell their products at lower futures prices. Soon, they will have to cut production.

If Europe continues to subsidize consumption, markets will become even more disordered. First, product prices will continue to rise. America, where demand tends to jump during the summer car travel season, will push them even higher.

Competition for LNG, the shortage of which has so far been largely absorbed by Asian consumers' self-restraint and switch to coal, will also increase when Europe starts replenishing its gas reserves for the winter.

Rapidly depleting reserves make the situation worse. Europe's jet fuel reserves cover about 50 days of consumption, their average level.

But modeling by Michelle Brouhard of Kpler, a data company, for The Economist shows that European stocks will fall rapidly if flows through Hormuz do not normalize by June. Those in other importing regions could disappear even faster (see chart 2, bottom panel).

The outlook could worsen if America, in an effort to rein in domestic prices, follows China's example and bans exports of refined products, which have increased by almost half since the start of the war.

Futures markets are denying all of this. Even if Hormuz were to reopen today, it would take months for Persian Gulf crude oil production, shipping, and refining to fully resume.

Saad Rahim of Trafigura, a trading company, thinks a cumulative loss of 1.5 billion barrels from the Gulf, or 5% of annual global production, is almost inevitable.

If the strait remains closed, it could easily double. The last time oil demand fell by 10% in a short time was during the Covid-19 lockdowns in 2020, a shock that also saw global GDP fall by more than 3%. Time to avoid a similar collapse is running out./ Monitor