IEA sees oil supply 'overhang' emerging after cutting long-term demand projection

Global oil demand will decline faster than expected in the coming decades -- creating a likely supply surplus -- as electric vehicles continue to erode oil use in road transport, while biofuels and hydrogen deflate the need for oil in the aviation and shipping sectors, the International Energy Agency said Oct. 16 in its latest long-term energy outlook.

After increasing by about 2.6 million b/d from 2023-30, global oil demand will peak by 2030 as rising sales of EVs and higher fuel efficiency will lead to petrochemicals surpassing road transport as the main contributor to oil demand growth, the IEA said in its closely watched World Energy Outlook 2024.

The Paris-based energy watchdog now sees global oil demand averaging 93.1 million b/d in 2050, 4.3 million b/d lower than it estimated last year under its base-case Stated Energy Policies Scenario (STEPS) in the World Energy Outlook. The biggest fall by use is a 2.7-million-b/d drop in oil demand from aviation and shipping, where sustainable aviation fuel is ramping up fast and the use of hydrogen-based alternative shipping fuels is growing.

Oil analysts at S&P Global Commodity Insights anticipate that global oil demand will peak at about 86 million b/d by 2027 and then decline to 73 million b/d by 2050.

Overall, the IEA report reiterated that under its base-case scenario, global demand for oil, natural gas and coal is still set to peak by 2030, although oil use for aviation and petrochemicals will increase to 2050. Fossil fuels met 80% of global energy demand in 2023 and will decline to 75% by 2030 and below 60% by 2050, according to the IEA. Under its central Announced Pledges Scenario (APS), demand for each fossil fuel peaks by 2025 and the overall fossil fuel share declines to around 35% in 2050.

With transport oil demand increasingly shifting from oil to electricity and alternative liquid fuels in the coming years, the IEA warned that the energy market upheaval was "wrong-footing oil producers."

"The slowdown in oil demand growth in the STEPS puts major resource owners in a bind as they face a significant overhang of supply. China has been the engine of oil market growth in recent decades, but that engine is now switching over to electricity," it said.

EV growth

By country, China remains on track to overtake the US as the world's biggest oil consumer by 2030, with declines in road transport offset by growth in petrochemicals, the IEA said. China's oil demand will average 17.4 million b/d in 2030 and fall to 11.8 million b/d in 2050, helped by fast-growing EV sales which already account for 60% of the global total.

Despite ongoing concerns over the pace of spending on green hydrogen projects to meet key policy and climate targets, the IEA hiked its estimates for low-emissions hydrogen-based fuels. Demand for hydrogen-based fuels, including ammonia, methanol and other synthetic hydrocarbons, is estimated to make up 4.6 million b/d of global liquids fuel demand by 2050, according to the report, almost a 25% jump from a year ago.

The IEA noted that EVs remained one of the key factors tempering future oil demand, but amid considerable uncertainty hanging over the future pace of sales.

Surging EV sales since 2015 have already displaced around 1 million b/d of gasoline and diesel demand, and EVs remove a further 12 million b/d of oil demand growth for road transport from 2023 through 2035 in the base-case scenario. The net result is a 2.5-million-b/d contraction in oil use for road transport over this period.

Although EV sales were up by around 25% year on year in the first half of 2024, the IEA acknowledged that EV sales in some markets have been slowing due to a phaseout of subsidies in the EU and more stringent CO2 emissions standards that are yet to take effect. Globally, however, the policy push for EVs will boost sales to "over" 40 million in 2030, higher than last year's report with a forecast of "almost" 40 million EVs by then.

Fuel switching and efficiency gains will reduce oil use in the buildings sector by 1.4 million b/d through to 2035, the IEA said.

The declines, however, will be offset by a 6.2-million-b/d increase in the use of oil in aviation and petrochemical production from 2023 through 2035.

Supply overhang

With demand for both global oil and gas demand growth slowing, the IEA predicted an easing of market balances and prices amid a "new energy market context" in the current decade.

With LNG demand projected to peak at around 700 Bcm by 2035 under the base-case scenario, the IEA said it sees a potential overhang of oil and LNG supply in the second half of the 2020s,

"The prospect of more ample -- or even surplus -- supplies of oil and natural gas, depending on how geopolitical tensions evolve, would move us into a very different energy world from the one we have experienced in recent years during the global energy crisis," IEA Executive Director Fatih Birol said in a statement. "It implies downward pressure on prices, providing some relief for consumers that have been hit hard by price spikes."

Under the IEA's central scenario, global oil prices are less a function of investment and market management strategies followed by major producers than by stringent policy measures expected to lead to a stronger decline in demand, the IEA said. As a result, the IEA estimates that the oil price needed to balance demand and supply will fall to $58/b in 2050.

"The production plans and resilience of major resource-holders strongly influence prices in our scenarios. In the STEPS and APS, continued market management by major producers is assumed to keep prices at higher levels than implied by the global supply cost curve," the IEA said.

Commodity Insights analysts forecast that Dated Brent crude will decline slowly over the coming decades to around $65/b in 2050 in constant 2023 dollars. The physical crude benchmark was assessed by Platts, part of Commodity Insights, at $73.525/b on Oct. 15.