Oil Demand Destruction Gains Momentum as Conflict Continues

Most mainstream energy forecasters have predicted that oil demand will resume its previous growth pattern after the Strait of Hormuz reopens. However, a new assessment from DNV's Energy Transition Outlook team suggests this may not be the case.

The likelihood of a long conflict in the Middle East has been underestimated, and with global oil production down by more than 5 million barrels per day relative to pre-war levels, demand is also down by over 3 million barrels per day. This contraction in demand is most pronounced in Asia, where road transport demand has fallen significantly.

As prices remain elevated, the shift to electric vehicles is accelerating, with EV sales in new markets jumping 97% in July compared to the same month last year. In the US, moderate demand destruction is also evident as higher prices lead to reduced driving.

DNV's Sverre Alvik notes that the strong link between sustained supply constraints and permanent demand destruction has been demonstrated throughout history. The structural changes introduced through fuel-efficiency standards and the replacement of oil-fired power generation following the 1973 and 1979 oil shocks are prime examples. As the conflict in the Middle East continues, the probability of permanent demand destruction increases.