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The global oil market is at a critical juncture, facing a significant slowdown in demand driven by China’s accelerated adoption of electric vehicles (EVs). New assessments from the International Energy Agency (IEA) highlight a dramatic shift as combustion-engine cars are increasingly pushed off the road in the world’s second-largest economy.
According to the IEA, worldwide oil demand is projected to increase by a mere 700,000 barrels a day in 2025, reaching a total just under 103 million barrels daily. This modest growth contrasts sharply with the aggressive expansion plans of major oil producers.
OPEC Ramps Up Output Amidst Shifting Landscape
Despite forecasts of decelerating demand, the Organisation of the Petroleum Exporting Countries (OPEC), a powerful cartel of oil-producing nations, is on track to significantly boost its supply. The IEA reports that OPEC is set to pump an additional 2.1 million barrels per day this year, bringing their collective daily output to a staggering 105 million barrels.
Industry experts are observing a pivotal moment in the market. Kieran Tompkins, an analyst at Capital Economics, noted, “We are at a really interesting turning point in the market just now. Peak oil demand is on the horizon.” For years, OPEC has strategically curtailed oil supply to stabilize and prop up prices. However, a new strategy is emerging, led by Saudi Arabia, aiming to loosen the spigot and reclaim market share potentially lost to non-OPEC producers like the United States.
Saudi Arabia dramatically increased its output by 700,000 barrels a day in June, reaching 9.8 million barrels daily. While the stated reason was to pre-empt potential disruptions from geopolitical events, the move underscores a broader shift in production strategy.
Conflicting Forecasts and Looming Surpluses
Adding to the market’s complexity are diverging predictions for future demand. Suhail al-Mazrouei, the United Arab Emirates’ energy minister, recently asserted that the market remains “thirsty” for OPEC’s oil, citing a lack of unsold stock buildup last month despite increased sales. OPEC’s internal forecast projects a more robust demand increase of 1.3 million barrels per day this year.
However, analysts at Macquarie Group corroborate the IEA’s more conservative outlook, suggesting that demand growth will barely reach half of OPEC’s projection. They warn that the confluence of slowing demand and escalating production is set to create “cartoonishly large” surpluses in the market this year.
This dynamic has already created volatility in crude prices, with Brent crude briefly climbing back above $69 a barrel on Friday, recovering from a 2% drop the previous day, as traders weighed immediate supply tightness against anticipated oversupply later in the year.
China’s EV Dominance Reshapes Oil Consumption
OPEC’s ambitions for higher output directly confront the steady decline in oil demand from China, where electric vehicles are rapidly replacing traditional combustion-engine cars. EVs constituted a remarkable 50% of Chinese car sales last year, a figure the IEA predicts will rise to approximately 60% this year. Currently, one in ten cars on Chinese roads is electric, and the 11 million EVs sold in China last year alone surpassed the entire global sales volume from just two years prior.
Beyond passenger vehicles, China’s truck fleet is also undergoing a significant transition, moving away from diesel towards liquefied natural gas. Macquarie forecasts China’s oil demand to increase by a mere 54,000 barrels a day this year – the slowest growth in nearly a decade, excluding specific periods during the pandemic and 2022.
“The oil market’s structural headwinds from China have come to the fore a lot more quickly than many people have appreciated,” remarked Kieran Tompkins.
Strategic Reserves Offer Short-Term Buffer
In the immediate term, the looming supply-demand imbalance could find some temporary relief through Beijing’s strategic move to build up its crude oil stockpiles to bolster energy security. Chinese entities have acquired an impressive 82 million barrels in the past three months for inventory, equivalent to 900,000 barrels of daily demand.
The IEA highlights that “Chinese companies are expected to continue driving the expansion of inventories, with the pace of stock building over coming months key to the market balance.” While this stockpiling may alleviate short-term pressures, the underlying structural shift driven by China’s electric vehicle revolution continues to redefine the global oil landscape for the long term.