Global oil demand set to drop below pre-COVID levels

The ongoing war in Ukraine, COVID-19 lockdowns in China and surging commodity prices are going to take a significant bite out of global oil demand this year, with the potential to calm high prices.

Oil demand is set to shed 1.4 million bpd, dropping below the highs set in 2019, with a rebound unlikely until at least 2023.

Additional COVID-related lockdowns or geopolitical issues could lead to further GDP growth reductions, applying additional downward pressure to demand forecasts.

The global economy is battling surging inflation, additional strict COVID-19 lockdowns in one of the world’s largest economies, and continuing supply chain disruptions, and the impact on oil demand will be significant.

Russia’s invasion of Ukraine and the consequent sanctions on Russian exports are sustaining high oil prices, leading to a broad economic slowdown and negatively impacting demand for oil.

Shrinking demand is a direct result of the impact of lower economic activity globally. Despite continued supply tightness, a demand slump could provide some respite for global prices.

Oil consumption is estimated to fall by 1.4 million bpd in Russia, Europe, the US and other OECD countries.

The new projection for oil demand shows an annual world average of 99.6 million bpd, dropping well below the pre-pandemic high of 100.2 million bpd set in 2019.

A demand rebound back to pre-pandemic levels is not likely until at least 2023.

The risk of tighter lockdowns in China cannot be ruled out, although road traffic activity in the country has stabilised lately.

Market hawks will be closely monitoring Beijing’s decisions regarding lockdowns in the coming days as an indicator of additional oil demand impacts.

A prolonged war between Russia and Ukraine may be accompanied by a significant increase in commodity prices, in particular oil and gas, especially if Europe decides to embargo Russian imports.

The Russian War worst case for oil demand is premised on Brent prices reaching US$180/bbl in 4Q22, triggering a further economic slowdown and outright destruction of oil demand.

In April, the IMF downgraded its 2022 world GDP growth forecast from 4.4% to 3.6%, citing the impact of global inflation, hawkish monetary policies in the US, lockdowns in China and supply chain disruptions worldwide.

It also cited the war in Ukraine, sanctions against Russia and elevated commodity prices as the other key factors weighing on the global economy.

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