In what appears to be a somewhat puzzling development for energy markets, oil prices have yet to surge to record highs despite what many consider the most severe supply disruption in the history of the market.

This is largely because traders continue to bet on a relatively quick resolution to the Strait of Hormuz crisis, even though it has now persisted for more than three months. Global inventories have also provided a temporary buffer against the shock, while China, the world's largest crude importer, has largely stepped away from the spot market. Most importantly, demand destruction is accelerating as high prices force consumers to cut consumption.

Beyond the current supply disruptions and conflicting signals surrounding the Middle East conflict, analysts are increasingly focused on how much demand could be lost permanently even after the crisis ends.

Inventories are cushioning the shock—for now

The global oil market entered the Iran conflict with a supply surplus, helping limit upward pressure on prices despite the war entering its fourth month. However, global inventories outside China are being depleted at a record pace, suggesting that the market’s safety cushion is rapidly shrinking and that the full impact of lost supplies may soon become visible.

According to data from Kpler, China alone accumulated more than 1.2 billion barrels of strategic and commercial inventories over the past year, while the rest of the world has experienced accelerating inventory drawdowns.

In early May, global stockpiles were being drawn down at a rate of roughly 1.5 million barrels per day. That pace has now increased to nearly 1.7 million barrels per day, pointing to growing supply tightness.

As inventories decline and oil prices rise above $100 per barrel, consumers have begun reducing demand. Across Asia, governments and consumers have responded to higher fuel costs by implementing measures such as shorter workweeks and expanded work-from-home arrangements for public-sector employees.

The trend is not limited to Asia. Consumers in Europe and the United States have also begun cutting fuel consumption and reducing air travel as gasoline prices and airline fares climb.

In the United States, cumulative gasoline costs paid by consumers since the start of the US campaign against Iran on March 1 have risen by roughly $40 billion, according to Patrick De Haan, Head of Petroleum Analysis at GasBuddy. He added that Americans have been paying between $400 million and $600 million more per day for gasoline over the past three months.

De Haan also noted that the US Strategic Petroleum Reserve is less than ten days away from falling to its lowest level since August 1983, a level not seen since the reserve began being filled in 1977.

Demand destruction gains momentum

As costs rise, consumers are rethinking their fuel spending habits. Normally, declining inventories would lead to much sharper increases in oil prices.

However, the scale of demand destruction has so far been large enough to offset part of the supply shock, especially when combined with China's absence from the spot market after building inventories sufficient for several additional months.

In China alone, oil demand has unexpectedly fallen by about 9%, equivalent to roughly 1.5 million barrels per day, according to JPMorgan analysts Natasha Kaneva, Lyuba Savinova, and Artem Vakhritin.

The analysts described the shift as a “quiet economic decision,” noting that many Chinese consumers have transitioned to electric transportation.

Similar changes are beginning to emerge elsewhere. Sales of electric vehicles continue to grow strongly across Asia and Europe, while US consumers, despite the absence of major federal incentives, are increasingly reconsidering private vehicle use and turning more frequently to public transportation and remote work as gasoline prices reach four-year highs.

Will demand return after the crisis?

The key question for analysts and the oil market over the medium and long term is whether demand will return to previous levels once the crisis ends, or whether governments and policymakers will permanently replace part of their oil and gas consumption with lower-carbon alternatives such as electric vehicles, solar power, and wind energy in order to reduce exposure to future geopolitical energy shocks.

JPMorgan analysts asked a fundamental question: “Can the world really function while consuming roughly 9% less oil?”

For now, the options remain limited. With the Strait of Hormuz still closed, inventories continue to fall toward critical levels, while consumers seek alternatives through electric vehicles or simply by driving and traveling less.

The longer the Hormuz crisis persists, the greater the supply disruption becomes, increasing pressure on governments to adopt long-term measures aimed at reducing dependence on Middle Eastern oil and gas.

As a result, part of the demand destruction that began as a temporary response to the crisis could ultimately become permanent.

At present, demand destruction is helping to restrain oil prices.

Commodity analysts at Goldman Sachs said that reduced consumption caused by higher prices is partially offsetting the impact of the actual supply shortage.

However, the inventory cushion that has supported the market is approaching exhaustion. Even China has begun drawing down its reserves, and with crude purchases expected to recover in the coming months, oil prices could experience a significant rally this summer, accompanied by the emergence of genuine supply shortages.

The S&P 500 and Nasdaq fell on Thursday after disappointing revenue results from Broadcom pressured semiconductor stocks, while investors paused following a record-breaking rally that had pushed the three major US indexes to fresh all-time highs.

Market performance

As of 9:36 a.m. ET, the S&P 500 was down 13.59 points, or 0.18%, at 7,540.09, while the Nasdaq Composite lost 215.53 points, or 0.80%, to 26,638.44.

Broadcom shares dropped 15% after the chipmaker also maintained its long-term target of generating $100 billion in AI chip sales.

The stock had gained about 55% during the current quarter and could lose nearly $350 billion in market value if losses persist through the close.

The S&P 500 technology sector fell 2.2%, marking the largest decline among major sectors, while the Philadelphia Semiconductor Index dropped 4.4%.

Shares of Marvell Technology and Advanced Micro Devices (AMD) each declined about 5%, while Micron Technology fell 6.6% and Qualcomm lost 2.3%.

Meanwhile, investor rotation away from technology supported other areas of the market, with nine of the eleven major S&P 500 sectors posting gains.

Healthcare stocks rose 2.4%, led by a 5% gain in UnitedHealth after Bank of America upgraded the stock to “Buy.”

That helped lift the Dow Jones Industrial Average by 520.81 points, or 1.03%.

The financial sector also gained 1.8% after suffering sharp losses in the previous session amid renewed concerns over private credit markets.

Blackstone became the latest asset manager to impose withdrawal restrictions on its flagship private credit fund following a surge in redemption requests.

Wall Street’s rally paused this week as investors assessed renewed tensions between the United States and Iran.

Daniela Hathorn, senior market analyst at Capital.com, said the current rotation appears less driven by a fundamental shift in the investment narrative and more by profit-taking, elevated positioning, and a reassessment of geopolitical risks after weeks of nearly uninterrupted gains.

Although both sides agreed to a ceasefire in early April, negotiations aimed at ending the conflict and reopening the Strait of Hormuz have made little progress, raising the risk of sustained high oil prices and persistent inflation pressures.

Economic data

Weekly jobless claims data showed that the number of Americans filing new unemployment claims rose more than expected last week, while Wednesday’s ISM survey indicated that the US services sector continued to expand in May.

Investors are now awaiting Friday’s comprehensive employment report, which will provide newly appointed Federal Reserve Chair Kevin Warsh with an updated assessment of labor market conditions ahead of his first policy meeting later this month, as consumers continue to face rising costs linked to the Iran conflict.

According to LSEG data, traders currently assign a 75% probability to a 25-basis-point interest-rate hike before year-end.

Richmond Fed President Thomas Barkin and San Francisco Fed President Mary Daly are also scheduled to speak on Thursday in the final public appearances by Federal Reserve officials before the pre-meeting blackout period begins.

Individual stock moves

Cybersecurity company CrowdStrike fell 8.5% after reporting higher operating expenses during the first quarter.

Meanwhile, Elon Musk’s SpaceX begins its investor roadshow on Thursday ahead of its planned market debut on June 12.

The company aims to raise $75 billion in what would be the largest initial public offering in history, valuing the company at $1.75 trillion and placing it among the ten largest publicly traded companies in the United States.

Copper prices rose during Thursday’s trading session amid growing concerns over global supply due to the Iran conflict and broader Middle East tensions, prompting several major financial institutions to raise their outlook for the industrial metal.

Developing new copper mines takes more than a decade, while the number of new mining projects continues to shrink. As a result, any supply shortfall can only be addressed through higher prices and, eventually, by substituting aluminum for copper in lower-value applications.

Front-month US copper futures are currently trading around $6.53 per pound, close to the record high reached last month.

The report noted that US copper prices continue to trade at a premium to global markets due to US tariff policies. Three-month copper on the London Metal Exchange is trading near $13,600 per metric ton, implying a premium of roughly 6% in the US market.

The United States is expected to make a final decision on copper import tariffs by the end of July, although markets have already begun pricing in the potential outcome.

Citigroup and Goldman Sachs raise copper forecasts

Citigroup has turned bullish on copper, saying uncertainty surrounding US tariff policy, combined with hopes for the reopening of the Strait of Hormuz this summer, is likely to push copper prices higher.

The bank’s analysts expect copper to reach $15,000 per metric ton within the next year.

Citigroup analysts said: “We expect continued strategic ambiguity from US policymakers rather than a clear and definitive announcement on tariffs. We believe the administration will not impose tariffs on refined copper, but it is unlikely to state that explicitly, in order to encourage the continued accumulation of excess copper inventories within the United States.”

Similarly, Goldman Sachs on Monday raised its year-end copper price target to $13,735 per metric ton from a previous forecast of $12,465.

The Iran conflict and supply risks

At the start of the Iran conflict, there were concerns that higher oil prices and geopolitical tensions would weaken copper demand. So far, however, that scenario has not materialized.

The report warns of a new risk facing the copper market: sulfur shortages. A significant portion of global sulfur supplies is shipped through the Strait of Hormuz, which remains closed.

Sulfur is a critical input in copper production. Without it, production costs rise rapidly, pushing prices higher and potentially slowing mine output.

Morgan Stanley also sees copper reaching $15,000

Morgan Stanley has likewise forecast copper reaching $15,000 per metric ton, noting that the metal is already trading near record highs while net long positions on the US COMEX exchange have climbed to record levels.

The bank said: “Although copper is already trading near all-time highs and net long positions on COMEX have reached record levels, we believe any pullbacks will be short-lived due to escalating supply disruptions, continued strength in US imports, and signs that China is once again rebuilding inventories during price declines.”

Morgan Stanley added that the upcoming US tariff decision remains the key market driver. However, the current price spread between COMEX and the London Metal Exchange is already encouraging copper flows into the United States.

The bank noted that if Washington ultimately decides to increase tariffs, the rally could accelerate even further.

Most cryptocurrencies declined during Thursday's trading session as risk appetite continued to deteriorate across global markets due to ongoing uncertainty surrounding the Iran conflict.

In trading, Bitcoin fell 5% to $63.7 thousand as of 13:52 GMT on CoinMarketCap.

The Iran conflict remains a major source of uncertainty

Israel and Lebanon said late Wednesday that they had agreed to implement a ceasefire, raising hopes for a potential agreement between Washington and Tehran. Iran had partially linked any agreement to an end to the fighting between Israel and the Iran-backed Hezbollah movement in Lebanon.

John Evans, analyst at PVM Oil, said Iran continues to insist on ending what it describes as Israeli aggression against Lebanon, particularly against Hezbollah, adding that there are already signs of a breakthrough.

Lebanese President Joseph Aoun said on Thursday that the ceasefire would take effect within 24 hours of receiving approval from all relevant parties.

US President Donald Trump also hinted on Wednesday that progress in negotiations with Iran could be achieved as early as this weekend.

Iranian Foreign Minister Abbas Araghchi said on Wednesday that communication between Tehran and Washington has not been cut off, but acknowledged that no progress has been made in the negotiations, adding that both sides are reviewing the texts that have been exchanged.

In the United States, the Republican-controlled House of Representatives approved a resolution on Wednesday aimed at preventing Trump from continuing the war against Iran. For the measure to take effect, it must also pass the Senate and secure a two-thirds majority in both chambers to override an expected presidential veto.

Economic data

On the economic front, a survey released Wednesday showed that the prices-paid component of the US services sector surged to its highest level in nearly four years last month, reinforcing economists' expectations that the Federal Reserve will keep interest rates unchanged until next year.