New Delhi [India], April 28 : The sharp fall in global oil demand is being driven more by supply shortages than by high prices, indicating a "forced demand loss" rather than traditional demand destruction, according to a report by JP Morgan.
The report highlighted that global oil supply disruptions surged to 9.1 million barrels per day (mbd) in March and widened to 13.7 mbd in April, following disruptions linked to the Strait of Hormuz. However, the usual balancing mechanisms failed to respond effectively.
It stated, "This suggests that much of the decline is not traditional, price-driven "demand destruction" but rather forced demand loss caused by missing supply. Put differently, physical shortages are constraining actual consumption, so what appears to be demand destruction is a supply loss showing up on the demand side of the ledger".
It noted that spare production capacity, largely concentrated in Saudi Arabia and the UAE, was not available to offset the disruption.
In the United States, supply response from shale producers typically takes three to six months, with only 0.3-0.7 mbd expected in that period, while larger increases of up to 1 mbd take six to 12 months.
Russia's spare capacity remains limited at around 300 thousand barrels per day, with output already down by 350 thousand barrels per day due to infrastructure disruptions.
With limited supply response, the market turned to inventories. Global oil inventories declined by 4.0 mbd in March and a steep 7.1 mbd in April, reflecting heavy reliance on stored reserves.
Despite this, the supply gap has not been fully offset, leading to a sharp decline in demand. Global oil demand fell by 2.8 mbd in March and is tracking a deeper fall of 4.3 mbd in April.
The report pointed out that this decline has occurred even though oil prices are not at extreme levels. Brent crude averaged just under USD 100 per barrel in March and April, while dated crude averaged USD 107 in March and USD 123 in April.
This suggests that the fall in demand is not primarily due to higher prices, but because of physical shortages limiting consumption. The report described this as "forced demand loss," where reduced supply directly translates into lower demand.
The impact has been most visible in the Middle East, Asia and parts of Africa, which together account for 87 per cent of the total demand decline in April. These regions are heavily dependent on Gulf oil supplies and have limited capacity to absorb supply shocks.
Sector-wise, petrochemicals and aviation have been the hardest hit. Shortages of key feedstocks such as LPG, ethane and naphtha have forced industrial units in Asia to cut operations, while aviation demand has weakened due to disruptions in flight activity. In India, LPG consumption declined by 13 per cent year-on-year in March, reflecting the broader impact on fuel demand.
The report noted that even after inventory drawdowns and demand decline, a gap of about 2 mbd still remains, indicating that further adjustment will be needed to restore balance in the market.
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