IEA says 'ready to act' if Middle East conflict escalates to hit oil supplies

The International Energy Agency said Oct. 12 it is 'ready to act' if the current Middle East conflict escalates to hit oil supplies in the region but trimmed its oil demand outlook on signs of demand destruction in the US and other countries.

Noting that there has been no direct impact on physical oil supplies from the conflict between Israel and Hamas militants in Gaza, the IEA said it expects the international community to "remain laser-focused" on risks to the region's oil flows if there are any signs that it could spill over politically to the wider Middle East.

"The IEA will continue to monitor the oil market closely and, as ever, stands ready to act if necessary to ensure markets remain adequately supplied," the IEA said in its latest monthly oil market report. "...While the prospect that oil supply flows will be impacted currently remains limited, the deadly strikes prompted traders to price in a higher geopolitical risk premium."

Market watchers have speculated that oil supplies from Iran could be hit if the US tightens sanctions on Tehran over its backing of the Hamas and Hizbollah militants currently in conflict with Israel. The Paris-based energy watchdog has a key role in coordinating the release of emergency oil stocks with each IEA member country obligated to hold oil stocks equivalent to at least 90 days of net oil imports and to be ready to collectively respond to severe supply disruptions affecting the global oil market.

The IEA left its forecast for world oil supply in 2023 largely unchanged on the month at a record 101.6 million b/d, adding that -- barring any unforeseen disruptions -- it is expected to average around 101.3 million b/d in the fourth quarter of the year. Non-OPEC+ is still expected to dominate the projected annual supply gains this year of 1.5 million b/d in 2023, it said. In 2024, the IEA also confirmed its previous estimate of 103.3 million b/d.

Demand destruction

On demand, the IEA cut its 2024 global estimate by 76,000 b/d from its previous forecasts to 102.7 million b/d, as higher prices and a shift to working from home in key consuming countries such as the US have helped to soften the demand outlook.

Citing a recent study from European think tank EconPol, the IEA said the rise of post-pandemic working from home means 500,000 b/d of fuel use is being avoided in the US alone. The IEA said 2023 will likely be the last year of US demand growth before a decline of 220,000 b/d sets in next year, when US gasoline consumption is forecast to decrease by 180,000 b/d amid structural efficiency gains and a harsher economic climate.

Demand destruction has hit emerging markets even harder, the IEA said, as currency effects and the removal of subsidies amplify a rise in fuel prices.

"There has been some evidence of large-scale demand destruction, especially in lower-income countries, like Nigeria, Pakistan and Egypt, and signs of accelerating declines within some OECD markets including the United States. These have been particularly centered on gasoline, with Nigeria seeing the latest and most abrupt response to sharply higher prices," the IEA said.

Nevertheless, global oil demand is forecast to continue its "strong growth trajectory" in the fourth quarter, the IEA said, underpinning an annual increase of 2.3 million b/d to 101.9 million b/d for 2023 as a whole. China and non-OECD economies account for 77% and 97% of the increase, respectively. Oil demand growth continues to be led by jet fuel/kerosene and petrochemical feedstocks.

Next year, global oil demand is still expected to decelerate to 880,000 b/d, as a "harsher economic climate and continued progress in energy efficiency weigh on oil consumption," the IEA said.

Stocks shrinking

On stocks, the IEA said global observed oil inventories shrank by 63.9 million barrels in August to a 10-month low, led by a "massive" 102.3-million-barrel draw in crude oil stocks. Oil on water declined by 40.6 million barrels, while OECD and non-OECD stocks fell by 3.5 million barrels and 19.7 million barrels, respectively.

OECD industry stocks fell counter-seasonally by 6.5 million barrels in August to 2.816 billion barrels, the IEA said, some 105.3 million barrels below the five-year average.

The IEA also said preliminary data shows that on-land inventories continued to draw in September, mainly in non-OECD countries, while oil on water rebounded as exports recovered.

Voluntary output cuts by Saudi Arabia and Russia are expected to keep the oil market in deficit as OPEC+ could pump 1.3 million b/d below the call on its crude in the fourth quarter, the IEA said.

"If extra cuts are unwound in January, the balance could shift to surplus, which would go some way to help replenish depleted inventories," the IEA said.