The International Energy Agency (IEA) has drastically cut its oil demand forecast for this year because it no longer believes the global economy will start to recover in the second half of the year. The Paris-based energy adviser to 28 industrialised nations now expects world oil demand to fall by 2.4 million barrels per day (bpd) this year, a bigger contraction than at any time since the early 1980s.
The new demand projection represents a downwards revision of 1m bpd from the agency's previous forecast, issued just a month ago. "For the fourth time since last October, we have slashed the economic assumptions that underpin our oil demand forecasts," the IEA said in its latest monthly oil market report, released yesterday. "This forecast implicitly discards a recovery in both global economic growth and oil demand from the second half of 2009, as we had earlier assumed."
The IEA said it now expected global GDP to contract by 1.4 per cent this year, rather than expanding modestly, as it had assumed in its February and March reports. It cited rising unemployment, falling industrial production and shrinking trade. The revised economic outlook, coupled with data indicating much lower oil consumption than expected in the first three months of this year, led the agency to project a 2.8 per cent drop in demand for the full year to 83.4m bpd.
The expected decline would exceed the UAE's current oil production of about 2.2m bpd. It represents more than half the record 4.2m bpd of production cuts pledged by Opec in recent months, and about 70 per cent of the cuts that Opec members have actually made. "This is a pretty exceptional period of demand collapsing," said David Fyfe, the head of the agency's oil industry and markets division. "I think everyone out there is trying to gauge when the recession is going to bottom out. We can't say definitively that global GDP is not going to worsen."
The IEA agreed with the consensus emerging from international economic institutions that global economic recovery will be delayed until next year. "Any green shoots are signalling recovery developing next year rather than this year," Mr Fyfe said. Countries within the Organisation for Economic Co-operation and Development (OECD) face "an unusually severe recession", with GDP likely to contract by 3.9 per cent this year, the IEA said. Falling OECD consumption would account for almost all of the projected drop in global oil demand.
Fuel consumption in the OECD "should remain subdued, as weak economic activity counteracts the normal seasonal rise", the agency said. But in another notable departure from earlier forecasts, it also predicted that oil demand in the developing world would contract this year, albeit marginally. The projected 0.1 per cent or 230,000 bpd drop in oil demand outside the OECD would be the first since 1994. A big contributing factor would be slowing economic growth in China, the world's second biggest energy consumer.
The "relentless" shrinkage in global demand projections has recently sent oil producers "scrambling" to cut crude deliveries, the IEA said, to prevent a further build-up in oil stockpiles that are now at their highest level since 1993. Led by Saudi Arabia, which alone has cut output by about 2m bpd, Opec has reduced oil exports by an "unprecedented" 3.36m bpd since September, the IEA estimated. At 27.84m bpd, Opec production is now at its lowest level since the US-led invasion of Iraq in 2003.
Prior to the release of the IEA report, crude had rallied above $52 a barrel on the New York Mercantile Exchange, which was closed yesterday for the US Easter holiday. After tumbling from $147 to $34 a barrel between last July and December, crude prices have recently shown signs of stabilising near their highest levels in four months, prompting Opec last month to postpone a decision on a further cut to its production target. This month, they have been buoyed by the Group of 20 nations' announcement of a US$1.1 trillion (Dh4.04 trillion) economic stimulus package and by signs of recovery on major stock markets.
But the IEA warned of "a false dawn". "Industrial activity indicators remain universally weak."
The group also reiterated its earlier warnings of an oil supply crunch once the economy recovers, if low oil prices undermine investment in new production capacity. Spending on oil development this year could slip this year by close to 20 per cent, it said.
tcarlisle@thenational.ae
