High Oil Prices Trigger Demand Destruction, But Will It Last?

Forecasters are divided on whether falling crude demand is a temporary response to high prices or a lasting course correction for global consumption. In my last column, I highlighted the roller coaster ride that oil prices, and by extension those working across the industry, have experienced over the past decade. I also mentioned the prospect of demand destruction, which some analysts are already baking into their year-end assessments. As the conflict between the US and Iran continues to simmer, the industry is on track to finish the year with oil prices far higher than most observers anticipated. Contributing to the tighter supply picture, albeit to a lesser extent, are Ukraine’s drone attacks on Russia’s oil processing and export infrastructure. More recently, Houthi strikes targeting Saudi Arabian energy assets and shipping routes in the Red Sea have added another driver of market uncertainty. As of this writing, the global benchmark of Brent crude is bouncing around $100/bbl to $105/bbl while the US benchmark of West Texas Intermediate is holding above $90/bbl. The prolonged period of high prices has led some to warn that the signs of demand destruction are emerging. In September, the International Energy Agency (IEA) said it believes global supply will fall by 5.7 million B/D to 101.7 million B/D in 2026, a 6% drop from 2025. The IEA also said world oil demand will likely fall this year by 2.5 million B/D, which was almost 1 million B/D more than it predicted in August. According to the IEA, demand destruction is emerging most clearly in Asia, where consumption of middle distillates used for transportation and heating is declining. The US Energy Information Administration (EIA) issued a less pessimistic outlook in June, forecasting that global oil demand would decline by 1.1 million B/D this year. While its October update focused primarily on supply conditions rather than demand, the agency noted that the volume of shut-in oil production in the Middle East fell from 5.8 million B/D in August to 4.8 million B/D in September. DNV’s outlook is even more bearish on demand than the IEA’s or the EIA’s. The Norwegian assurance and risk management firm estimates that global oil demand could already be off by more than 3 million B/D, almost equal to Japan’s daily oil consumption.