Credit crunch cutting into oil demand: IEA

Approaching recession and the banking crisis cut into global demand for oil and may set back investment in new oilfields.

Approaching recession and a banking cash crisis are cutting into global demand for oil and may set back investment in new oilfields, the International Energy Agency said today. Falling demand in advanced countries "in the face of higher prices is now being perpetuated by weakening economic prospects", the IEA said. This "maelstrom" was causing "havoc" on oil markets, and had led it to make "significant" downwards revisions. The economic downturn, together with "a spiralling liquidity crisis", could tip leading industrialised economies "into outright recession", the agency forecast in its monthly oil market analysis.

But "no-one can foresee the ferocity or duration of the current economic tempest, nor whether full-blown recession will be avoided", it said. "The question is whether emerging markets will be affected." The IEA's oil demand estimates now show sustained decline from the OECD member countries, but demand from developing economies have been resilient. However, "we have yet to see unambiguous evidence of a sharp slowdown from China", and demand in the Middle East remained robust, it said.

Overall world demand this year would be 86.5 million barrels per day ? a reduction of 240,000 barrels from the previous estimate, to show a rise of 0.5 per cent from last year. The world forecast for next year was cut by 440,000 barrels per day to 87.2 million barrels per day, showing an annual increase of 0.8 per cent. These are far smaller annual increases than the oil market has seen in the last few years.

The oil price fell by $4.08 to $82.51 in Singapore today, after the Organization of Petroleum Exporting Countries had said it would meet on November 18 to discuss the crisis and the oil market. Some analysts say that the price fall might push Opec to reduce output. Also, uncertainty, and "tightening credit and equity markets will slow the pace of investment," the agency said. "Investment is already being affected at a number of highly leveraged (indebted) companies in locations such as Russia and the Caspian."

Ambitious expansion plans, "for national champions like Brazil's Petrobras, which will need upwards of US$500 billion", could be further delayed. "Some analysts envisage a sizeable proportion of current global drilling rig orders will be cancelled." *AFP