IEA sees smaller fall in oil demand as price hits high

The International Energy Agency raises its forecast for global oil demand this year, signalling confidence that the recession is abating.

The International Energy Agency (IEA) has nudged up its forecast for global oil demand this year, after nine months of downward revisions, signalling confidence that the recession is abating. On a day when oil prices reached a new seven-month high above US$72 a barrel, the Paris-based energy adviser to 28 industrialised nations said that supply and demand factors were reasserting themselves in oil markets. "While the bull run in prices since mid-February was largely driven by market sentiment that a recovery in the global economic outlook was nearing, the latest surge in crude oil markets was partly fuelled by signs of slightly stronger fundamental factors," the IEA said in its latest monthly oil market report released yesterday. The start of the US summer driving season and a "substantial" drawdown in floating oil stocks have helped boost prices, it said. Oil prices have climbed 61 per cent this year, recovering from their steepest drop in history after peaking at a record $147 per barrel last July. This week alone they have gained 5 per cent. But until recently, there was no sign that oil demand might have started to recover. Now, with the emergence of a possible rebound in petrochemical activity in developed countries, the IEA said it expected this year's drop in world oil demand to be smaller than it predicted last month by 120,000 barrels per day (bpd). It still projected a decline in consumption of 2.9 per cent, or 2.5 million bpd, to 83.3 million bpd, the sharpest contraction since 1981. "These adjustments do not necessarily reflect the beginning of a global economic recovery, signalling at best what could be the bottoming out of the recession, possibly related to industrial inventory rebuilds," the agency said. "Demand for transportation fuels remains subdued, which suggests that other economic sectors are still constrained." Nonetheless, an increase in crude purchases by China, the world's second-biggest energy consumer, and a drop in US oil inventories, helped crude extend a three-day rally yesterday. Chinese crude purchases rose last month by 3.9 million bpd to their highest level in 14 months, according to customs data. The US government reported on Wednesday that domestic oil stockpiles had fallen by 4.38 million barrels to 361.6 million barrels in the week ending June 5. US petrol stocks fell by 1.6 million barrels to 201.6 million barrels, confounding analysts' predictions of a rise in stocks of 800,000 barrels. The previous day, the US government's energy data arm, the Energy Information Administration, trimmed 10,000 bpd from the drop in global oil demand it had forecast for this year. "The big news was the bigger than expected decline in stockpiles," Toby Hassall, an analyst at Commodity Warrants Australia, told Bloomberg. "That's somewhat of a fundamental justification for this rally continuing." The IEA said the amount of oil stored at sea in tankers worldwide fell by about 27 per cent last month, as higher crude prices reduced the attraction of holding oil for future sale. According to Bloomberg, a tanker hired by ConocoPhillips that had been holding oil since February off the Orkney Islands in Scotland sailed for Chile last week; and last month Total, the French energy group, sold at least 1.8 million barrels of oil it had been storing off the UK coast. The IEA said OPEC's decision on May 28 to leave its output targets unchanged had also supported oil prices. But its data suggested that OPEC members' compliance with production cuts was slipping. In the IEA's estimation, the 11 OPEC members bound by production quotas pumped 25.96 million bpd of crude last month, up by 110,000 bpd from April, and about 1.11 million bpd above the group's official limit. OPEC ministers will meet again on Sept 9 to review supply levels and oil market developments. Kuwait's oil minister said on Wednesday the group was unlikely to act unless prices rose above $100 a barrel. To balance oil markets for the rest of the year, the IEA calculated that all 12 OPEC members, including Iraq, would need to supply about 27.7 million bpd of crude, or about 700,000 bpd less than they pumped last month. Iraq, which does not have a quota, is seeking to increase its production from about 2.4 million bpd. [e-mail]