World oil demand hits record as supply constraints take hold

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World oil demand is forecast to hit a record high this year against a backdrop of constrained supply and a new warning from the United Nations Secretary-General that hope for staving off the worst effects of climate change is dimming.

Crude consumption will climb by nearly 2 per cent to an unprecedented 101.7 million barrels a day, with the gain driven largely by the reopening of China’s economy following the lifting of COVID-19 restrictions, the International Energy Agency (IEA) said in its January oil market report.

The Paris-based organization said demand would have been even higher, if not for the global improvements in energy efficiency and booming sales of electric vehicles. Those two factors have reduced the forecast demand figure by as much as 900,000 barrels a day and will help contain the market impact of limited oil supply gains, it said.

“Here we are a few years post-pandemic and global oil demand is continuing at the pace we saw prior to the pandemic, and different efforts to transition [to low-carbon energy] seem to be happening slower than expected,” said Jeremy McCrea, analyst at Raymond James.

“That all said, fear of this energy transition has caused a lot of oil and gas operators to slow their spending and as a result we’re getting less supply to meet this.”

The forecast for more fossil fuel consumption comes amid growing alarm over climate change as severe weather, such as the storms and flooding that hit California in recent weeks, becomes more frequent and damaging.

UN Secretary-General Antonio Guterres pointed out that greenhouse gas emissions are at record levels and growing, and said the cost of failing to reverse that will render parts of the world uninhabitable.

“The commitment to limit global temperature rise to 1.5 degrees is nearly going up in smoke,” Mr. Guterres said at the World Economic Forum in Davos, Switzerland. Without tougher action to slash emissions, the world is headed for a temperature increase of 2.8 degrees above preindustrial levels. “And the consequences, as we all know, would be devastating.”

World oil production growth is set to slow to one million barrels a day, down from last year’s 4.7 million, a gain that was driven by output from the Organization of the Petroleum Exporting Countries (OPEC). The IEA predicted a drop of 870,000 barrels a day among OPEC and its allies will temper an increase of 1.9 million barrels a day from countries outside the OPEC+ club. That is because of declines in Russia amid international sanctions in reaction to its invasion of Ukraine.

But the agency conceded a high degree of uncertainty in its production outlook owing to a recent partial rebound in Russian crude exports following an early collapse after the European Union imposed an embargo.

In addition, in late December, the Group of Seven rich nations set a price cap on Russian supplies with the aim of reducing Russian President Vladimir Putin’s ability to fund his invasion. Research firm Rystad Energy reported Russia’s exports by sea rose to 3.2 million barrels a day in the second week of January, a 10-week high. China and India remain top buyers of the country’s oil.

West Texas Intermediate oil fell 70 U.S. cents to US$79.48 a barrel after initially jumping following the forecast on Wednesday. It has fallen from just over US$122 last June as growing concerns about economic slowdown driven by rising interest rates and inflation overshadowed the impact of the war in Ukraine on oil markets.

The demand outlook adds support to expectations of higher oil prices in 2023, said Martin King, analyst at RBN Energy LLC.

“The IEA’s just said, if you’ve got 800 million people or more moving around with greater mobility, they’re probably going to consume more oil. If the growth is 600,000 or 800,000 barrels a day this year for China, that’s going to offset middling demand growth or small losses in other countries,” Mr. King said.

Even with its call for higher oil demand, the IEA has predicted unprecedented investments in renewable energy as the world tries to wrestle down emissions and bolster energy security. On Wednesday, it said gains in energy efficiency, supportive adoption of electric vehicles and prudent handling of energy oil stockpiles “will be more crucial than ever.”

In October, it said such investment in renewables is set to rise more than 50 per cent from current levels to more than US$2-trillion a year by 2030, as global energy markets undergo a massive restructuring to deal with the far-reaching energy shock triggered by Russia’s invasion of Ukraine.

It also said demand for fossil fuels will peak much earlier than previously expected if governments follow through with their current policies for shifting to cleaner energy sources. It has predicted oil demand will level off in the mid-2030s before ebbing toward 2050.