Demand for crude oil will likely see the biggest plunge in the second quarter since the COVID-19 pandemic slammed the global economy in 2020, the International Energy Agency (IEA) warned on Tuesday.
Surging prices caused by the war in the Middle East will force many countries and industries to curb oil use, and "demand destruction will spread as scarcity and higher prices persist," the agency said in its monthly report.
The conflict has "thoroughly upended the global outlook for oil consumption," the IEA said, as it now predicts an 80,000 barrel per day (bpd) drop in demand growth this year, from a 640,000 bpd rise in its March report.
In its March report, the agency characterized the war as the largest-ever oil supply disruption, but had still expected year-over-year growth in both supply and demand.
The IEA said the deepest cuts in oil consumption have come from the Middle East and Asia-Pacific so far, for naphtha, LPG and jet fuel in particular.
It noted that its latest forecasts assume a "base case" of oil shipments resuming in May through the Strait of Hormuz, which Tehran has effectively closed since the U.S. and Israel began bombing Iran on Feb. 28.
This would lead to a decline in demand of 1.5 million bpd in the second quarter, "the sharpest since COVID-19 slashed fuel consumption," the IEA said.
Oil producer group OPEC on Monday lowered its own prediction for world oil demand in the second quarter, but kept its full-year outlook unchanged.
Overall demand is forecast to have contracted by 800,000 bpd in March and is seen dropping by 2.3 million bpd in April, according to the IEA.
But a "protracted case" if the strait remains closed could see oil demand plunge even further, it warned.
"In this case, energy markets and economies around the world need to brace for significant disruptions in the months to come," it warned.
Largest supply disruption ever
On the supply side, the IEA said global output is expected to fall by 1.5 million bpd on average this year from last year, as strikes on Middle East energy infrastructure and effective closure of the Strait of Hormuz hit production and exports, an approximate 2.6 million bpd swing from its March forecast of a 1.1 million bpd rise.
Attacks on regional energy infrastructure and the closure of the Strait of Hormuz led to a loss of 10.1 million bpd of supply in March, the agency said, calling it the largest oil supply disruption in history.
Overall, the IEA forecasts imply that supply will be higher than demand by just 410,000 bpd in 2026, a reduction from a 2.46 million bpd surplus in last month's report.
Oil prices were little changed on Tuesday. Brent futures were trading at $98.60 per barrel at 8:47 a.m. GMT, little changed from $98.58 at 7:59 a.m. GMT just before the report release.
Hormuz reopening key to easing strains
The flow of crude oil, refined fuels and natural gas liquids was just 3.8 million bpd in early April, down from more than 20 million bpd in February before the war began.
"Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy," the IEA said.
The agency also presented a more severe scenario with longer-term supply disruptions, which could draw almost 2 billion barrels of oil from stocks and force demand to fall 5 million bpd year-over-year on average from the second quarter to the fourth quarter.
"With the geopolitical situation still in flux and the prospects for a lasting negotiated settlement to the conflict still unclear, our two cases span the range of probable outcomes."
The IEA also noted that a major beneficiary of the Mideast disruptions has been Russia, which nearly doubled its earnings from oil exports in March after the U.S. eased sanctions on Russian crude to help offset soaring energy prices.
Russia earned $19 billion last month as crude and oil product exports soared to 7.1 million barrels per day from just 320,000 barrels a day in February, the IEA said.