Fed's Lorie Logan Issues Stark Hormuz Warning — Consumers May Face A World With Less Oil, Gas

• Logan added that the economic consequences of reduced energy consumption due to tight supplies would depend on the degree to which users switch to alternative energy sources.
• She said the disruption in the Strait of Hormuz has removed nearly 13 million barrels per day of global oil supply, equivalent to more than 10% of the world's consumption.
• International Energy Agency Executive Director Fatih Birol warned last week that the global oil market could enter a “red zone” by July.

Federal Reserve Bank of Dallas President Lorie Logan sounded an alarm on Wednesday that the world may have to consume less oil and natural gas if the Strait of Hormuz crisis continues to drag.

During a speech at a Bank of Japan conference in Tokyo, Logan warned that U.S. oil production would not be able to fill the fall in global oil supplies caused by the Iran war. As a result, she said that consumers may now have to face a reality where there is not enough supply of oil and natural gas.

“With supplies highly constrained, if shipping through the strait does not soon return to prewar levels, world oil and natural gas consumption could need to fall more meaningfully than it has so far,” she added.

Economic Consequences Of Reduced Energy Consumption

Logan added that the economic consequences of reduced energy consumption due to tight supplies would depend on the degree to which users switch to alternative energy sources.

“The economic consequences would depend on the degree to which end users can switch to other energy sources or use energy more efficiently, versus curtailing economic activity,” she said.

Meanwhile, U.S. West Texas Intermediate (WTI) crude futures maturing in July were down nearly 4%, hovering around $90.31 a barrel at the time of writing. Brent crude futures expiring in July fell about 3% to hover around $93.87 a barrel.

The United States Oil Fund ETF (USO) was down more than 3% at the time of writing, while the ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell nearly 4%.

Major U.S. oil stocks like Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), and ConocoPhillips (COP) fell about 1% in Wednesday’s pre-market trade.

Hormuz Crisis Has Reduced Supply By Over 10%, Says Logan

Logan said the Strait of Hormuz disruption has removed nearly 13 million barrels per day of global oil supply, equivalent to more than 10% of the world's consumption.

According to the Dallas Fed's latest survey of energy executives, industry leaders expect only modest growth in U.S. oil production despite the conflict, with most forecasting output gains of up to 250,000 barrels per day by the end of 2026 and 500,000 barrels per day in 2027, she added.

That covers roughly 2% of the supply gap by 2026, and 4% in 2027.

Logan cited three constraints on higher U.S. oil output: capital discipline, labor and equipment shortages, and limited pipeline capacity in West Texas. She added that export bottlenecks also limit the ability of U.S. natural gas to offset global supply disruptions.

Last week, International Energy Agency Executive Director Fatih Birol said during a Chatham House session that the global oil market could enter a “red zone” by July due to the travel season amid dwindling stocks, according to a report by CNBC.

He warned that it will likely take a “lot of time” for oil production in the Middle East to return to pre-Iran war levels.

Meanwhile, U.S. equities gained in Wednesday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.29%; the Invesco QQQ Trust ETF (QQQ) rose 0.5%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) gained 0.45%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘bullish’ territory.

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