Global oil demand is nearing its peak as clean energy takes center stage, an IEA report says Ship’s crew

According to a new report from the International Energy Agency (IEA), global oil demand growth is expected to slow significantly in the coming years, before stalling this decade amid the transition to cleaner energies.

The report entitled Medium Term Oil Market Report 2023, forecasts that global oil demand will grow 6% to 105.7 million barrels per day (mb/d) between 2022 and 2028, supported by robust demand from the petrochemical and aviation sectors. Despite this cumulative increase, however, annual demand growth is expected to slow to just 0.4 mb/d in 2028 from 2.4 mb/d this year, suggesting that global oil demand is nearing its peak.

The global energy crisis, triggered by rising prices and concerns about security of supply, has accelerated the transition to cleaner energy technologies. According to the report, one of the main drivers of the decline will be the transport sector. After 2026, the use of oil as a transport fuel is expected to decline as electric vehicles become more common, biofuels become more important and fuel efficiency increases.

“The transition to a clean energy economy is gaining momentum and a peak in global oil demand is on the cards before the end of this decade as electric vehicles, energy efficiency and other technologies advance,” said IEA Executive Director Fatih Birol. “Oil producers need to keep a close eye on the increasing pace of change and adjust their investment decisions to ensure an orderly transition.”

Global oil markets have slowly readjusted after a few turbulent years, first disrupted by the Covid-19 pandemic and later by the Russian invasion of Ukraine. The global energy crisis triggered by the war in Ukraine has led to a significant reorganization of global trade flows.

The new report suggests that global oil markets could tighten in the coming months as output cuts by the OPEC+ alliance dampen growth in global oil supply. However, the report also indicates that the various pressures on the markets are likely to weaken in the coming years.

While China saw oil demand pick up again in the first half of 2023 following the lifting of its strict Covid-19 restrictions, demand growth is expected to slow significantly from 2024 onwards. Still, it will, due to rising petrochemical demand and strong consumption growth in emerging and developing economies, which the report says could offset a slowdown in advanced economies.

Investments in oil and gas exploration, exploration and production this year are on track to hit their highest levels since 2015, with projected growth of 11% year over year to $528 billion in 2023. However, this level of investment can be adequately met. Projected medium-term needs exceed the amount needed to achieve net-zero emissions, the report says.

The report’s projections assume that major oil producers will continue to expand capacity even as demand growth slows. As a result, it is expected to have a reserve capacity cushion of at least 3.8 MB/day, primarily focused on the Middle East. However, the report highlights several factors that could affect the market balance in the medium term, including uncertain global economic trends, OPEC+ decisions and China’s policy in the refining industry.

Looking at medium-term plans to increase global production capacity, non-OPEC+ oil-producing countries, notably the United States, Brazil and Guyana, dominate forecasts with an expected increase of 5.1 million barrels per day by 2028. Within OPEC+ Saudi Arabia, the United Arab Emirates and Iraq are leading capacity-building plans, while African and Asian members are expected to face challenges from declining production. In addition, Russian production is expected to decrease due to sanctions. Overall, the report forecasts net capacity growth of 0.8 mb/d across the 23 OPEC+ members for the full forecast period.

In the refining sector, closures, conversions to biofuel plants and project delays have reduced global overcapacity since the pandemic. This, combined with a significant drop in Chinese oil product exports and disruptions to Russian trade flows, resulted in record profits for the industry last year. Although the report expects net expansion of refining capacity through 2028 to outpace growth in demand for refined products, differing trends across products may mean that a repeat of middle distillate shortages in 2022 cannot be ruled out.

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