As JPMorgan recently highlighted, supply shocks have a profound effect not just on the supply side of the market but also on demand. History has shown us that four out of the last five oil shocks since the 1970s led to recessions. Today, we are facing an extreme situation with shut-ins surging to unprecedented levels. According to estimates, around 12 million barrels per day (mb/d) of global output could soon be impacted, equivalent to approximately 11% of the world’s total oil production.

The consequences of such a drastic reduction in supply are already visible in physical markets, particularly across Asia. The shortage doesn’t remain theoretical; it becomes tangible and manifests itself in various ways. For instance, prices have skyrocketed, with no signs of slowing down anytime soon. As demand destruction sets in, the economy takes a hit, leading to a decrease in economic activity and GDP growth.

The interconnectedness of modern economies only exacerbates the situation. A disruption in one region can quickly spread to others, causing widespread damage. The global nature of trade and commerce means that the impact of a supply shock is felt far beyond the immediate area affected.

It’s important to recognize that the effects of demand destruction aren’t limited to the oil industry alone. The ripple effects can be felt across various sectors, including manufacturing, transportation, and construction. As the demand for energy products decreases, so does the demand for raw materials, leading to a decline in production and economic activity.