Tuesday, September 13, 2011

IEA sees slower oil demand growth

KUALA LUMPUR: The International Energy Agency (IEA) expects oil demand growth to be reduced to an average 1.0 million barrels per day (bpd) this year and 1.4 million bpd next year.

It said on Tuesday, Sept 13 it was scaling back its demand outlook as its earlier expectations of 4.5% to 5% world GDP growth was unsustainable due to government debt in the OECD and the spectre of inflationary pressures and currency protectionism in emerging markets.

'Our own GDP assumptions for 2011 and 2012 are this month scaled-back nearer to 4% annual growth, with the bulk of the downgrade focused on the OECD countries,' it said in its Oil Market Report.

The IEA also said the recent spell of market tightening could moderate in the short term, assuming that recent supply disruptions also recede.

To recap, in its report, it said market observers were puzzling over the 'paradox' of weakening economic growth and oil demand indicators on the one hand, and US$110 per bbl crude on the other.

While it acknowledged that not everyone is paying US$110 and refiners with ready pipeline access to heavily discounted crude in the US Midwest were enjoying bumper margins, unlike their brethren in Europe and elsewhere.

'WTI (West Texas Intermediate) aside however, benchmark Brent crude since early May has see-sawed in a range of between US$105 and US$120/bbl,' it said, adding that the broader equity and commodity sell-off seen in early-August caused prices to plunge by around US$10 each time.

The IEA said oil prices had recovered within weeks, raising questions about the key drivers of prices.

However, it explained growing concerns about the health of the global economy, which would translate to slower demand, had prompted it to revised downwards its oil demand projections for 2011 and 2012.

'However, the potential for slightly easier market fundamentals in the months ahead needs to be viewed against a backdrop of an actual and pronounced tightening in the market evident since mid-2010.'' Demand strength in 2H10 saw consumption running ahead of supply to the tune of nearly 1.4 million bpd.

'The focus has now switched more to supply, amid slowing demand growth in 1H11, with both the Libyan disruption and temporary, but widespread, non-OPEC outages leading to a continued market tightening,' it said.

The IEA estimated supply lagged demand by over 0.5 million bpd in 1H11, and July and August have also seen OECD industry stocks fall below the five-year average for the first time since June 2008.

Add in the quality dimension, whereby supply outages have overwhelmingly been concentrated in light-sweet grades.

'Our underlying 'call on OPEC crude and stock change' for 3Q11 now stands at 31.3 million bpd, and for the next three quarters looks likely to average between 30 million bpd and 30.5 million bpd near recent OPEC output levels.

'That suggests that the recent spell of market tightening could moderate in the short term, assuming that recent supply disruptions also recede,' it said.

The IEA said news from Libya that oil production has begun once again is very welcome, although the road back to full operational recovery is likely to be a long and difficult one.

'Given the ever-present scope for demand and supply-side surprises, so too could be the route to a more comfortable market balance,' it said.

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