The decrease in demand is weighed down by renewed Chinese lockdowns and an ongoing slowdown in the Organisation for Economic Co-operation and Development (OECD) area, the Paris-based energy body said in a report on Wednesday.
Oil demand is forecast to rise by “2 million bpd in 2022 and 2.1 million bpd in 2023”, marginally lower than in last month’s report, the IEA said.
“This is partly offset by large-scale switching from gas to oil, estimated to average 700,000 bpd during the fourth quarter of 2022 and first quarter of 2023, double the level of a year ago.”
Robust oil use for power generation in the Middle East and in Europe owing to record natural gas and electricity prices is providing additional support, the IEA said.
At the same time, more oil is hitting the market. IEA member countries released “nearly 180 million barrels” of government stocks from March through August, with a further 52 million barrels scheduled for the next two months, it added.
OECD industry stocks rose by 43.1 million barrels to 2.705 million barrels, narrowing the deficit versus the five-year average to 274.9 million barrels, according to IEA estimates.
Meanwhile, lockdowns across China that are affecting about 65 million citizens in the world’s largest energy importer remain a concern for energy markets.
“For now, a deteriorating economic environment and recurring Covid lockdowns in China continue to weigh on market sentiment,” the IEA said.
Brent crude oil futures slipped below $90 a barrel in early September, the lowest level since January and more than $34 a barrel below a June peak, according to the IEA estimates.
“This is the largest 90-day decline since March-April 2020 and is only exceeded prior to 2020 by market routs in 2014-15 and 2008-09. Yet, diesel and jet fuel markets remain exceptionally tight, as reflected in current pricing,” the agency said.
Oil prices have remained volatile this year. Brent rose to a notch under $140 a barrel in March after Russia’s military offensive in Ukraine. Trading has remained volatile amid demand concerns, rising inflation and a subsequent increase in interest rates.
However, the prices rose about 2 per cent on Wednesday, recovering from Tuesday's lows, on the IEA's projected increase in gas-to-oil switching owing to high prices this winter.
Brent, the global benchmark for two thirds of the world’s oil, was trading 2.51 per cent up, at $95.51 a barrel at 8.39pm UAE time on Wednesday. West Texas Intermediate, the gauge that tracks US crude, was up 2.93 per cent at $89.87a barrel.
The IEA's projections come a day after Opec kept its 2022 oil demand forecast unchanged despite inflation and the Ukraine war. The producers’ group estimates global oil consumption in 2022 to average 100 million bpd, it said on Tuesday.
For 2023, Opec’s forecast for global oil demand growth remains unchanged at 2.7 million bpd, with total oil demand averaging 102.73 million bpd.
Meanwhile, the weakening global economic outlook could also dent demand.
In July, the International Monetary Fund lowered its growth forecast for the global economy to 3.2 per cent this year, from its previous projection of 3.6 per cent in April.
The EU embargo on Russian crude oil and product imports that comes into effect in December 2022 and February 2023, respectively, is also expected to result in deeper declines, according to the IEA.
“An additional 1 million bpd of products and 1.4 million bpd of crude will have to find new homes,” it said, adding that Russian total oil production is forecast to "decline to 9.5 million bpd by February 2023", a 1.9 million bpd drop compared to February 2022.