Oil demand growing at a slower pace as post-Covid rebound runs its course

Global oil demand growth returns to historical trend

Global oil demand growth is currently in the midst of a slowdown and is expected to ease to 1.2 million barrels a day (mb/d) this year and 1.1 mb/d in 2025 – bringing a peak in consumption into view this decade. This is primarily the result of a normalisation of growth following the disruptions of 2020-2023, when oil markets were shaken by the Covid-19 pandemic and then the global energy crisis sparked by Russia’s invasion of Ukraine.

Despite the deceleration that is forecast, this level of oil demand growth remains largely in line with the pre-Covid trend, even amid muted expectations for global economic growth this year and increased deployment of clean energy technologies.

In both 2022 and 2023, global oil consumption rose by more than 2 mb/d as economies continued their recoveries from the Covid-19 shock and saw spikes in personal mobility, along with exceptional releases of pent-up demand for travel and tourism. While there are reasonable grounds for uncertainty about how complete the global recovery is, both oil demand data and mobility indicators suggest that its pace has slowed sharply and that the period of demand growth above the historical average is coming to an end.

China’s post-Covid rebound is running out of steam

Without a steep fall in oil prices, a sudden resurgence in the post-pandemic recovery or an acceleration in economic activity, it is unlikely that global oil demand growth will approach the levels seen in 2022 and 2023. Indeed, the pace of gains slowed substantially in the second half of 2023, and the latest data shows that the trend continued at the beginning of 2024.

Oil use increased by an estimated 1.6 mb/d year-on-year in the first quarter of 2024, down from 1.9 mb/d in the fourth quarter of 2023 and more than 3 mb/d during the middle of last year. Given that China was the last major economy to lift public health restrictions related to the pandemic and saw an abrupt economic recovery in mid-2023, this easing of year-on-year demand growth is likely to continue during 2024.

Indeed, because the timing of Chinese lockdowns was quite different from the rest of the world, global oil demand growth in 2023 was extremely dependent on the country. With the explosive phase of the pandemic rebound largely complete elsewhere, China contributed to more than three-quarters of the global increase in demand (1.7 mb/d out of 2.3 mb/d). The world’s second largest economy will remain the mainstay of global expansion this year. However, gains are projected to fall to 540 kb/d. In the absence of a dramatic acceleration in other countries, this will result in a wider global slowdown.

In the decade up to 2023, almost two-thirds of all oil demand growth came from China. Over this period, the nation’s GDP grew at an annual average rate of 6%. An expected slackening in economic growth, to a rate of between 4% and 5% in 2024 and 2025 – combined with the rapid domestic uptake of oil-substituting technologies such as electric vehicles (EVs) and high-speed rail – means that in 2024 and 2025, only a little over one-third of oil demand growth is expected to come from China.

Demand for aviation fuel is easing as air traffic stabilizes

The other major driver of rising oil consumption in 2022 and 2023 was a steady recovery in air traffic as pandemic-era travel restrictions were relaxed. Demand for jet fuel/kerosene, primarily from the aviation sector, grew by more than 1 mb/d in both years and contributed almost half of the increase in global oil demand.

However, gains have moderated since the first half of 2023, according to Airportia data. As a result, the increase in demand for jet fuel/kerosene in 2024 is forecast to be far smaller, at 230 kb/d. In addition to a stabilisation in air traffic, there have also been large gains in the fuel efficiency of aircraft since 2019. This has meant that, despite roughly equivalent activity, fuel demand from the sector was more than 6% lower in the second half of 2023 than in the same period in 2019. This trend is set to continue as more new planes with vastly improved fuel economy enter the global fleet, helping to restrain the impact of increasing demand for air travel on oil use during the medium term.

Global consumption of oil is set to peak, but its centrality remains

While we expect growth in oil consumption in 2024 (1.2 mb/d) and 2025 (1.1 mb/d) to remain robust by historical standards, structural factors will lead to a gradual easing of oil demand growth over the rest of this decade. Continued rapid gains in the market share of EVs, particularly in China; steady improvements in vehicle fuel economies; and, notably, efforts by Middle Eastern economies, especially Saudi Arabia, to reduce the quantity of oil used in power generation are together expected to generate an overall peak in demand by the turn of the decade.

Oil remains extremely important to the global economy, and across some of its key applications, alternatives still cannot easily be substituted. In the absence of additional energy and climate policies and an increased investment push into clean energy technologies, the decline in global oil demand following the peak will not be a steep one, leaving demand close to current levels for some time. Nevertheless, cooling Chinese demand growth and considerable progress on the deployment of clean energy transition technologies mean that the oil market is set to enter a new and consequential period of transformation.
Source: IEA