Global oil demand will grow more slowly than previously thought following an economic lull in Asia, the International Energy Agency said, while warning that supplies stand to tighten due to U.S. sanctions on Iran.
Disappointing fuel consumption in China, Japan and Brazil meant 2019 started with a “tough quarter,” the agency said, lowering its global demand estimate for the first time since October. As a result, world oil inventories surprisingly swelled during the first three months of the year.
Nonetheless, stockpiles are set to plunge sharply this quarter as demand picks up and as U.S. sanctions squeeze production in Iran, which could fall this month to the lowest since the country’s war with Iraq in the 1980s, the IEA said.
“There is a modest offset to supply worries from the demand side,” the Paris-based agency, which advises major economies on energy policy, said in its monthly report. “Even so, slower demand growth is likely to be short-lived, as we believe that the pace will pick up during the rest of the year.”
Oil prices are holding just above $70 a barrel in London as traders await the full impact of American sanctions on Iran, and clarity on how quickly other OPEC members such as Saudi Arabia raise production to offset any losses. Tensions in the Middle East flared this week as Riyadh said two oil tankers and some facilities came under attack.
The IEA slashed estimates for global oil demand in the first quarter by 400,000 barrels a day, and for the year as a whole by a more modest 200,000 a day. As a result, the growth rate for 2019 was lowered by 90,000 barrels a day to a still “healthy” 1.3 million a day.
Because of the unexpected weakness in demand, oil stockpiles ballooned by 700,000 barrels a day in 1Q — about seven times as much as previously estimated — even as the Organization of Petroleum Exporting Countries and its partners reduced production to keep markets balanced.
The surplus though seems about to turn into tightness as demand recovers, the agency cautioned, with inventories poised to decline by a similar amount this quarter. Stockpiles in developed nations fell by 25.8 million barrels in March and in terms of the levels required to meet projected demand, have already slipped to the lowest since July.
Iran’s oil production has already slumped to the lowest since September 2013 with the onset of renewed U.S. sanctions, to 2.6 million barrels a day, and may plunge to the lowest in decades this month as the penalties take full effect, the IEA said.
The agency said it welcomed signals from other producers that they’re prepared to fill the gap. Saudi Energy Minister Khalid Al-Falih said in late April that the kingdom will ultimately accommodate Iran’s customers, though won’t rush to increase production.
For the time being the Saudis and other OPEC members are keeping output steady, pumping 30.2 million barrels a day last month, according to the IEA. Key OPEC nations will confer with partners such as Russia and Kazakhstan in the Saudi city of Jeddah this weekend on how to manage supplies during the second half of the year.