The International Energy Agency (IEA) has warned that global oil prices could continue to climb higher in the coming months, as the world’s oil demand reached a new peak in June and August, and supply remains tight due to production cuts by major producers. The IEA also revised down its forecast for oil demand growth in 2024, citing slowing economic conditions, stricter fuel efficiency standards and increased transition away from fossil fuels.
Record-High Demand Driven by China and Summer Travel
According to the IEA’s monthly report, global oil demand hit a record 103 million barrels per day (bpd) in both June and August, surpassing the pre-pandemic levels of 2019. The agency expects the average daily demand for 2023 to reach 102.2 million bpd, up 2.2 million from a year ago and the highest annual level ever.
The IEA attributed the strong demand growth to China, which accounted for more than 70% of the increase and reached new highs despite persistent concerns over the health of its economy. Other factors that boosted oil consumption include summer air travel and the increased use of oil in power generation, especially in the Middle East and Asia.
The IEA also noted that the demand recovery was uneven across regions and sectors, with some areas still facing challenges from the Covid-19 pandemic and its variants. The agency said that the outlook for oil demand remains uncertain and depends on the evolution of the virus, the pace of vaccination campaigns and the effectiveness of policy measures.
Supply Constraints Push Prices Higher
While demand soared, global oil supply fell by 910,000 bpd to 100.9 million bpd in July, mainly due to a sharp reduction in output from Saudi Arabia, which voluntarily cut its production by more than its quota under the OPEC+ agreement. The IEA said that global inventories fell by 17.3 million barrels in June, with industry stocks 115.4 million barrels below the five-year average. Preliminary data indicate that inventories have continued to fall in August, marking the fourth consecutive monthly decline.
The IEA said that these supply constraints have pushed global crude oil prices up by 15% since the beginning of July, reaching near 2023 highs. The agency warned that the OPEC+ production targets, if maintained, pose “a risk of driving prices still higher”. The OPEC+ group, which consists of the Organization of the Petroleum Exporting Countries (OPEC) and its allies led by Russia, agreed in July to gradually increase its output by 400,000 bpd each month from August until December, restoring about 5.8 million bpd of production that was cut during the pandemic.
However, the IEA said that this increase may not be enough to meet the growing demand and balance the market, especially as some OPEC+ members may struggle to raise their output due to technical or political challenges. The agency also pointed out that non-OPEC supply growth has been weaker than expected, as some producers face operational issues or delays in project start-ups.
Demand Growth to Slow Down in 2024
Despite the strong rebound in oil demand this year, the IEA expects the growth to slow down significantly in 2024, falling by more than half to 1 million bpd, down 150,000 bpd from its previous forecast. The agency said that this reflects “lacklustre economic conditions”, tighter fuel efficiency standards and increased transition away from fossil fuels.
The IEA said that the post-pandemic recovery has “largely run its course” and that global GDP growth will moderate from 6% in 2023 to 4.5% in 2024. The agency also said that oil demand will face headwinds from structural changes in consumer behaviour, such as reduced business travel and increased teleworking, as well as from policy measures to curb emissions and promote clean energy alternatives.
The IEA said that these factors will affect different sectors of oil demand differently, with some showing more resilience than others. For instance, the agency expects road transport demand to peak in 2023 and decline thereafter, while aviation demand will recover more slowly and remain below its pre-crisis level until 2025. On the other hand, petrochemicals demand will continue to grow strongly throughout the forecast period, driven by rising plastics consumption in emerging markets.