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Middle East Conflict to Drive Oil Demand Contraction This Year, IEA Says

-- The International Energy Agency on Tuesday forecast global oil demand to turn negative this year due to the Middle East conflict, penciling in the sharpest consumption decline in the second quarter since the COVID-19 pandemic.

The agency now forecasts demand to drop by 80,000 barrels a day this year, compared with a 640,000-barrel rise predicted last month.

Oil consumption is anticipated to shrink by 1.5 million barrels a day in the second quarter, representing the steepest plunge since COVID-19, the IEA said. Demand is expected to contract by 800,000 barrels per day year over year in March and by 2.3 million barrels this month, the IEA said.

"Initially, the deepest cuts in oil use have come in the Middle East and Asia Pacific, mainly for naphtha, LPG and jet fuel," according to the IEA report. "However, demand destruction will spread as scarcity and higher prices persist."

Energy prices have soared in the aftermath of the US-Israel war with Iran that have curtailed shipments through the crucial Strait of Hormuz. While Washington and Tehran have agreed to a temporary ceasefire, the two sides were unable to reach a deal during negotiations in Pakistan over the weekend.

Brent crude declined 4% to $95.40 a barrel in Tuesday trading, while West Texas Intermediate fell 6.7% to $92.42.

"Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy," the IEA said. "The prospects for a lasting negotiated settlement to the conflict remain unclear at this stage."

On Monday, the Organization of the Petroleum Exporting Countries lowered its second-quarter oil demand forecast, but maintained its full-year estimates amid expectations for a rebound in the second half.

The US navy on Monday began a blockade of maritime traffic entering and exiting Iranian ports.

Global oil supply plunged by 10.1 million barrels a day to 97 million barrels last month, amid Tehran's attacks on energy infrastructure in the Middle East and restrictions to tanker movements through the strait, according to the agency. In March, it forecast supply to drop by 8 million barrels for the month.

Last month, the IEA agreed to release a record 400 million barrels of oil amid concerns around supply disruptions caused by the Middle East conflict.

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