Demand destruction: an indelicate forecast

Saudi oil minister Prince Abdulaziz bin Salman used this week’s WPC Energy Congress in Riyadh to reassure global markets of the kingdom’s commitment as a supplier of hydrocarbons and to find alternatives to export constraints in the Strait of Hormuz.

As Francesca Washtell reported, Saudi Arabia plans to convert an unnamed gas pipeline to pump oil until May next year, which should add an incremental 1.2 million barrels per day to export capacity. Along with upgrades to the East-West pipeline, this could increase capacity to 10 million bpd over the next two to three years.

At the same event, Opec secretary-general Haitham Al Ghais projected that the global call for oil will rise by 1.7 million bpd next year as demand deferred by the US-Iran conflict returns.

Let us hope so.

Det Norske Veritas (DNV), a Norwegian organisation that examines energy supply and infrastructure worldwide, has produced its useful annual energy transition outlook. Demand features prominently.

DNV shares the view of the International Energy Agency, the watchdog whose analysis has long been more pessimistic than Opec’s. It estimates that global oil demand fell by 5.3 million bpd year on year in the second quarter of this year and by 3.4 million bpd in the third. Bear in mind that until February global oil demand was about 105 million bpd.

DNV, which is profit-making although owned by a Norwegian non-profit, also sets out a base scenario in which oil demand declines by 1.9 percent for the full year 2026. Most of the lost demand is recovered next year, when demand grows by 2.5 percent. That is roughly in line with Opec’s analysis.

The document becomes interesting – and, for us here in the Arabian Gulf, disturbing – when it considers a longer-term conflict.

Demand destruction is a phrase that haunts oil and gas producers such as Saudi Arabia. It speaks of unsold barrels that disappear permanently from end-users’ shopping lists as they turn to alternatives such as wind, solar, hydrogen and – whisper it quietly – coal.

DNV’s scenario assumes that the Middle East conflict persists until 2030 and that oil and gas prices remain elevated for those four years.

In that four-year conflict – by no means unthinkable – DNV sees demand destruction becoming structural. It draws parallels with the oil demand shocks of 1973 and 1979 and, in the gas market, Russia’s invasion of Ukraine in 2022.

Shipping and aviation are relatively immune because alternative fuels are scarce to non-existent. Road transport and chemical feedstocks, however, are exposed, DNV says.

“Petrochemicals appear to be experiencing the largest demand reduction, with both oil and gas consumption declining by about 7 percent in 2026. Most of this decrease is in China,” the outlook says. China has considerable expertise in using coal as an alternative feedstock.

DNV foresees a short-term reduction in global oil and gas demand of 4-6 percent while a conflict lasts, and permanent demand destruction of 2-5 percent relative to its base case.

Such projections are necessarily hypothetical, with a wide margin of error. For Middle Eastern oil producers, the numbers are arguably painful but not catastrophic. They are, however, thought-provoking.

Separately, DNV downgraded its projections for carbon capture and storage, a technology on which hopes of limiting emissions rest. “Deployment over the last year has been progressing more slowly than anticipated,” the outlook says.

While the near-term project pipeline supports significant growth in carbon capture, final investment decisions have not been made at the pace previously assumed and several projects have been delayed, the study says.

Further reading

• IEA slashes global oil demand forecast as war drives up prices

• Bullish Opec says annual $700bn needed to meet oil demand
• The Gulf needs carbon taxes, not just capture, to reach net zero