Oil market future uncertain after rebound from Covid-19 shock, IEA says

Based on today’s policy settings, global oil demand is set to rise every year through 2026 but stronger policies and behaviour changes could bring a peak in demand soon, an IEA report says.

IEA said in Oil 2021, its latest annual medium-term market report, that the forecast for global oil demand shifted lower, and demand could peak earlier than previously thought if a rising focus by governments on clean energy turns into stronger policies and behavioural changes induced by the pandemic become deeply rooted.

But in the report’s base case, which reflects current policy settings, oil demand is set to rise to 104 million barrels per day (mbpd) by 2026, up 4 per cent from 2019 levels.

Fatih Birol, the IEA’s executive director, said: “The Covid-19 crisis caused a historic decline in global oil demand – but not necessarily a lasting one. Achieving an orderly transition away from oil is essential to meet climate goals, but it will require major policy changes from governments as well as accelerated behavioural changes. Without that, global oil demand is set to increase every year between now and 2026.

“For the world’s oil demand to peak anytime soon, significant action is needed immediately to improve fuel efficiency standards, boost electric vehicle sales, and curb oil use in the power sector”.

Those actions – combined with increased teleworking, greater recycling, and reduced business travel – could reduce oil use by as much as 5.6 mbpd by 2026, which would mean that global oil demand never gets back to where it was before the pandemic.

Asia will continue to dominate growth in global oil demand, accounting for 90 per cent of the increase between 2019 and 2026 in the IEA report’s base case. By contrast, demand in many advanced economies, where vehicle ownership and oil use per capita are much higher, is not expected to return to pre-crisis levels.

IEA added that the world’s oil production capacity was projected to increase by 5 mbpd by 2026. At the same time, the historic collapse in demand has resulted in a spare production capacity cushion of a record 9 mbpd that could keep global markets comfortable in the near term.

To meet the growth in oil demand to 2026 in the IEA report’s base case, supply needs to rise by 10 mbpd by 2026. The Middle East, led by Saudi Arabia, is expected to provide half that increase, largely from existing shut-in capacity.

“No oil and gas company will be unaffected by clean energy transitions, so every part of the industry needs to consider how to respond as momentum builds behind the world’s drive for net-zero emissions. Minimising emissions from their core operations, notably methane, is an urgent priority. In addition, there are technologies vital to energy transitions that can be a match for oil and gas company capabilities, such as carbon capture, low-carbon hydrogen, biofuels and offshore wind”, Birol stated.

The global refining sector is struggling with excess capacity. Shutdowns of at least 6 mbpd will be required to allow utilisation rates to return to normal levels. Meanwhile, China, the Middle East, and India continue to drive new capacity growth.

As a result, Asian crude oil imports are forecast to surge to 27 mbpd by 2026, requiring record levels of Middle Eastern crude and Atlantic Basin production to fill the gap. Gasoline demand may have peaked, though, as efficiency gains and the shift to electric vehicles offset mobility growth in emerging and developing economies.

IEA also claimed that demand for aviation fuels, the area that was hardest hit by the pandemic, is forecast to gradually return to pre-crisis levels. A shift to online meetings and conferences – along with persistent corporate efforts to cut costs and hesitation by some citizens to resume leisure travel – could permanently alter travel trends.