Oil demand will drop after 2026 says IEA report

The International Energy Agency (IEA) forecasts that demand for oil as transport fuel will decline after 2026, but overall consumption is expected to be supported by strong petrochemicals demand.

Growth in the world’s demand for oil is set to slow ‘almost to a halt’ in the coming years, with high prices and security of supply concerns hastening the shift towards cleaner energy technologies, according to the IEA’s Oil 2023 Medium-Term Market Report. Based on current government policies and market trends, global oil demand will rise by 6% between 2022 and 2028 to reach 105.7 million barrels per day (mb/d), supported by robust demand from the petrochemical and aviation sectors, says the agency. However, annual demand growth is expected to shrink from 2.4 mb/d this year to 0.4 mb/d in 2028.

In particular, the use of oil for transport fuels is set to decline after 2026 as the expansion of electric vehicles, the growth of biofuels and improving fuel economy reduce consumption.

‘The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight 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 pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition.’

Global oil markets are still slowly recalibrating after three turbulent years caused by the Covid-19 pandemic and then by Russia’s invasion of Ukraine, added the IEA. Global oil markets could tighten significantly in the coming months, as production cuts by the OPEC+ alliance temper an upswing in global oil supplies.

China was the last major economy to lift its Covid-19 restrictions at the end of 2022, leading to a post-pandemic oil demand rebound in the first half of 2023. Yet demand growth in China is forecast to slow markedly from 2024. Nevertheless, burgeoning petrochemical demand and strong consumption growth in emerging and developing economies will more than offset a contraction in advanced economies, says the report.

Global upstream investments in oil and gas exploration, extraction and production are on course to reach their highest levels since 2015, growing 11% year-on-year to $528 billion in 2023. While the impact of higher spending will be partly offset by cost inflation, such sustained investment would meet forecast demand in the period covered by the report. However, it exceeds the amount that would be needed in a world on track to achieves net zero emissions by 2050.

The report’s projections assume that big oil producers maintain their plans to build up capacity even as demand growth slows. This is expected to result in spare capacity cushion of at least 3.8 mb/d, concentrated in the Middle East. The report nonetheless notes factors that could affect market balances over the medium term

– including uncertain global economic trends, the direction of OPEC+ decisions and China’s refining industry policy.

Oil-producing countries outside the OPEC+ alliance dominate plans for increasing global supply capacity in the medium term, with an expected rise of

5.1 mb/d by 2028 led by the US, Brazil and Guyana. Saudi Arabia, the United Arab Emirates and Iraq lead plans for capacity building within OPEC+, while African and Asian members are set to struggle with continuing declines, and Russian production falls due to sanctions. This makes for a net capacity gain of 0.8 mb/d from the 23 members in OPEC+ over the report’s forecast period.