Oil supply disruption risk from Middle East conflict remains elevated – IEA

LONDON (ICIS)–The risk of supply disruption and higher costs as a result of escalating tensions in the Middle East and attacks on the Red Sea remains “elevated”, the International Energy Agency (IEA) said on Thursday, with global demand growth expected to slump this year.

7.2m bbl/day of crude oil and oil products, around 10% of total global trade, passed along the Red Sea route in 2023, along with 8% of liquefied natural gas volumes, with the current main alternative, around southern Africa, adding around a fortnight to delivery times.

The longer routes are “adding pressure on global supply chains and boosting freight and insurance costs,” the IEA said in its monthly oil report.

The agency continues to predict a drastic slowdown in oil demand growth this year, averaging 1.2m bbl/day compared to an estimated 2.3m bbl/day in 2023, which the IEA attributed to an end to the post-COVID recovery, weak GDP growth, energy efficiency and the rise of electrified vehicles.

The estimate is an upgrade from previous IEA forecasts in recent months. In late 2023 the agency had estimated that demand growth would average around 900,000 bbl/day for 2024, ticking up to 1.1m bbl/day in its December outlook.

The IEA’s projection remains substantially below OPEC’s demand growth forecast, which it reaffirmed at 2.2m bbl/day in its latest market report, released this week.

The cartel left the bulk of its projections for 2024 unchanged, including GDP and demand, but reduced expectations for non-OPEC supply growth slightly, from 1.4m bbl/day to 1.3m bbl/day.

OPEC also released its first forecasts for 2025, predicting that GDP would tick up to 2.8% from an estimated 2.6% in 2024, while oil demand growth is expected to slow to 1.8m bbl/day. Non-OPEC supply is expected to grow 1.3m bbl/day driven by North America, Brazil, Norway, Kazakhstan and Guyana.

The IEA is projecting that global oil supply will hit a new high of 103.5m bbl/day in 2024, a rise of 1.5mbl/day year on year, led by the Americas, despite the impact of arctic weather in the US and Canada this month impacting production.

Despite the substantially lower expectations for oil demand growth by the IEA this year, the petrochemicals sector, particularly in China, is expected to remain a substantial driver of consumption.

“Over the course of 2023, the pace of demand growth outside of China slowed significantly, to around 300,000 bbl/d on average during H2 2023. China will continue to lead oil demand growth in 2024, with its expanding petrochemical sector gaining an ever-larger share,” the IEA said.

Despite production cut extensions by the OPEC+ coalition introduced at the start of the year and potential for market balance to tip into a slight supply deficit at the start of the year, non-OPEC production growth is likely to outpace consumption growth, the IEA added.

IEA member countries may also be prepared to inject some of their estimated 4bn bbl of crude reserves, including 1.2bn in state-controlled stocks, into the market to prevent market panic in the wake of the ongoing supply disruption, the IEA added.

“That buffer should help assuage market jitters and angst among governments, industries and energy consumers,” the agency said.

Focus article by Tom Brown.

Thumbnail photo: An offshore oil platform on the North Sea near Scheveningen, Netherlands. Source: Hollandse Hoogte/Shutterstock)