Weak Demand Keeps Oil Price Risks Two-Sided

Overview

This report by Goldman Sachs analyzes the reasons behind the recent decline in oil prices, noting that despite ongoing geopolitical tensions in the Middle East, oil prices have retreated significantly, primarily due to demand-side weakness. The report points out that current oil price risks are two-sided: on one hand, supply disruptions in the Middle East may pose risks of rising prices, while on the other hand, weak demand may lead to price declines. In particular, road fuel demand in China and Europe, as well as petrochemical feedstock demand in Asia, have all performed poorly, indicating that oil demand is more sensitive to price.

Core views

The report identifies two demand-side reasons for the weakening of oil prices: first, physical and financial destocking. In March, due to geopolitical uncertainty, the market engaged in restocking, but as expectations for a ceasefire in the Middle East strengthened, investors began reducing positions, and physical inventories also declined. Second, end-market demand is weak. Actual oil demand has reacted more strongly to high prices than expected, leading forecast agencies to downgrade demand expectations for early 2026. In terms of specific demand, demand for jet fuel and petrochemical feedstocks (such as naphtha, liquefied petroleum gas, and ethane) has been weak. In May, global jet fuel demand was 6% below trend levels (approximately 0.4 million barrels per day). Utilization rates of ethylene plants in Asia have dropped by 14 percentage points since February, production in chemical sub-sectors in China and Japan has also declined, and India's demand for naphtha and LPG fell by nearly 0.15 million barrels per day year-on-year. Road fuel demand shows a divergent trend. Gasoline and diesel demand are weak in China and most European countries, while demand in the US and India remains strong. For example, China's gasoline retail sales fell by more than 20% year-on-year in April; this relates to weak sales at major refineries and a slight decline in road traffic, but also reflects growth in subway, rail freight, and EV charging. European retail data shows that road fuel sales in Western Europe fell by approximately 8% year-on-year in April. Demand for gasoline and diesel in India remains firm due to policies that stabilized retail prices. The report also notes that oil demand has become more sensitive to price for two main reasons: first, structural factors, such as the rise of EVs in China and the improvement of urban transportation systems, as well as the proliferation of remote work technology, which increase opportunities for consumers to switch to alternative modes of travel; second, factors specific to 2026, such as high public attention to oil prices and the expectation that Middle East supply shocks may be temporary, which have led to delays in travel and petrochemical production, while Asian countries encouraging remote work has also suppressed oil demand. Based on this, Goldman Sachs believes its forecast for Brent/WTI oil prices in Q4 2026 ($90 and $83, respectively) faces two-sided risks. Although supply losses in the Middle East may bring risks of rising prices, weak demand could also lead to price declines. Based on retail sales data from China and Western Europe in April, the estimated downside risk to demand is about 2 million barrels per day, equivalent to lowering its Q4 2026 Brent oil price forecast by approximately $10/bbl (assuming half of the demand decline persists through the end of the year).

Analysis framework

Goldman Sachs employed a demand-side analysis approach to explain oil price trends, assessing changes in oil demand by comprehensively evaluating factors such as retail sales data, industrial production, and policy orientation. The report analyzed the specific manifestations of weak demand by observing oil consumption across different regions and products, and explored the underlying reasons. At the same time, the report utilized historical data and market expectations to forecast future oil price trends and identified the risk factors involved.

Methodology notes

• Supply and Demand FrameworkSupply and Demand Framework

  Supply and Demand Framework

  The report explains the reasons for the decline in oil prices by analyzing demand-side weakness, reflecting the application of the supply and demand framework in commodity analysis.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Volume-Price Decomposition

  The report analyzes oil consumption in different regions and products to reveal the specific manifestations of weak demand, reflecting the application of volume-price decomposition in industry analysis.

Key data

• Brent Crude Futures Decline22%Since the end of March
• Global Jet Fuel Demand Deviation-6%0.4 million bbl/d below trend in May
• Asia Ethylene Plant Utilization Decline-14 percentage pointsSince February
• China April Gasoline Retail Sales YoY-20%Significant decline
• Western Europe April Road Fuel Sales YoY-8%Approximately 0.6 million bbl/d
• India Naphtha and LPG Demand YoY-0.15 million bbl/dApril data
• Demand Downside Risk2 million bbl/dBased on retail sales data in China and Western Europe
• Oil Price Downside Magnitude$10/bblImpact on Q4 2026 Brent oil price forecast

Impact & implications

The report suggests that due to weak demand, it is difficult for oil prices to rise significantly in the short term, but if supply disruptions in the Middle East persist, there is still room for oil prices to move upward. For energy companies, this means uncertainty regarding earnings prospects, necessitating close monitoring of demand recovery and geopolitical developments. Furthermore, the widespread adoption of electric vehicles and the promotion of remote work may alter the structure of oil demand in the long term, posing challenges to the traditional energy industry.

Risks

• Middle East supply disruptions may persist, pushing oil prices higher
• Global economic slowdown leading to further decline in oil demand
• Accelerated EV adoption hastening the arrival of peak oil demand
• Government policy changes, such as encouraging remote work, may suppress oil demand

What to watch

• Developments in the geopolitical situation in the Middle East
• Recovery of oil demand in China and Europe
• EV sales and related policy trends
• Global macroeconomic data and monetary policy trends