IAE Reduces Oil Demand Forecast In Response to Strait of Hormuz Crisis

The International Energy Agency has significantly revised its projections for global oil demand, citing the ongoing conflict in the Middle East and the effective closure of the Strait of Hormuz. This situation has resulted in what the agency describes as the largest disruption in oil supply in history.

According to recent reports, the IAE anticipates a decline of 1.5 million barrels per day during the second quarter of the year. This marks the most substantial fall in fuel consumption since the onset of the Covid-19 pandemic. Initially, the agency had predicted a growth of 640,000 barrels per day in its earlier March forecast; however, the unfolding crisis has forced a reevaluation.

The agency suggests that the conflict has impacted global oil demand by approximately 80,000 barrels per day. The forecast indicates that consumption will contract by around 800,000 barrels per day year-on-year in March and by 2.3 million barrels per day in April. The most profound reductions in demand have been recorded in the Middle East and the Asia-Pacific region, with specific sectors such as naphtha, liquefied petroleum gas, and jet fuel being particularly affected.

The closure of the Strait of Hormuz, an essential oil passage, has resulted in the loss of millions of barrels in Middle Eastern production, leading to a sharp increase in fuel prices. With oil reserves proving inadequate to fill the supply gap, demand has visibly diminished since the conflict escalated.

The agency’s forecasts assume that transportation via the vital waterway will resume by mid-year, albeit not at pre-conflict levels. There remains a considerable degree of uncertainty regarding the conflict’s future development, which may render these projections overly optimistic.

OPEC has also revised its outlook, lowering its predictions for world oil demand by 500,000 barrels per day for the second quarter, settling at just over 105 million barrels daily. Nonetheless, their full-year assessment remains unchanged.

The sharp decline in global oil supply, which fell by 10.1 million barrels per day to 97 million barrels per day in March, is attributed to continued attacks on energy infrastructure and significant restrictions affecting tanker movements. The price of Brent crude has experienced remarkable fluctuations, with its largest monthly gain recorded in March. Prices have surged by 63 per cent since the beginning of the year, when Brent crude was trading at approximately 60 dollars per barrel.

Initial hopes for dialogue to resolve the crisis have led to some instability in oil prices, as they fell back below 100 dollars recently. However, resuming flows through the Strait of Hormuz remains pivotal for alleviating pressure on energy supplies and stabilising market conditions.