China to keep oil markets tight

International Energy Agency warns that Chinese oil consumption could tighten oil markets in coming month.

Demand for oil in China might be temporarily high because of the Olympic Games.

Chinese oil consumption could rise after the Olympic Games, contrary to many analysts' expectations, tightening oil markets in coming months and helping to keep prices up, the International Energy Agency (IEA) said in its August oil market report yesterday. The added impact of damage to the central Asian BTC Pipeline and the outbreak of hostilities between Russia and Georgia may have placed a floor under crude prices following recent declines, the IEA added. Oil prices are down 23 per cent from their peak near $150 a barrel last month. "We would hesitate before automatically extrapolating the recent [downwards] price trend," the IEA said. "It looks too early to cite definitively a sea change in the market." The IEA, based in Paris, is the energy adviser to 27 industrialised countries and its forecasts often contrast with those of Opec, which represents the interests of oil exporters. The IEA has consistently argued for Opec to increase output and bring prices down to protect the developed world from inflation and recession. The IEA's most recent data suggest that demand for Opec oil supply next year will be 1.1 million barrels per day lower than the group's current output, indicating Opec might need to cut production. It estimated the call on Opec crude next year at 31.1 million barrels per day (bpd), versus the group's recent output of 32.2 million bpd. Chakib Khelil, the Opec president, has called for the group's membership to restore production to their assigned quotas. The IEA conceded that oil market fundamentals have recently eased, allowing prices to drop substantially over the past few weeks. The agency cut its forecast for global oil demand growth this month by 100,000 bpd from its projection a month ago, with much of the revision stemming from the changing outlook for the US, where it predicted oil consumption would decline 3.1 per cent this year and two per cent next year. However, Chinese demand is expected to grow by 5.7 per cent next year, slightly stronger than this 5.6 per cent, as consumers in the world's fastest-growing major economy spend more on travel. "Recent trends in Chinese crude runs suggest a possibility of stronger than expected demand," the IEA said. Fuel use in China could rebound over the next few months as the country lifts temporary measures introduced to curb pollution in Beijing during the Olympics. The Chinese government ordered the temporary closure of a number of oil refineries and coal-fired power plants to improve air quality in the capital before the Games. On the supply side, the IEA estimated Opec spare production capacity at a narrow 1.5 million bpd in the wake of recent oil production increases, particularly from Saudi Arabia. It revised downwards the demand for Opec oil for the rest of this year because output from countries outside the organisation is expected to rebound strongly towards the end of this year and the early part of the next. The IEA estimated that Iranian oil production in June and July was higher than it had forecast, with a further output increase of 60,000 bpd expected in September. In Iraq, political and regulatory bottlenecks are becoming more of an impediment to increased oil supply than security risks, the agency said. With the government shortening the terms of proposed technical service contracts, international oil producers may sit out the opportunity for immediate participation in Iraq's oil sector, preferring to wait for longer-term contracts to be awarded next year, it said. A number of analysts have recently issued bearish oil price forecasts. VM Group yesterday predicted a further $10 to $15 a barrel drop in crude oil prices due to falling demand amid an economic slowdown in the US. "Prices have to tumble below $100 before economic sentiment turns around," Mike Cassell and Gary Mead, analysts, wrote in a report. Lehman Brothers said this week that Asian demand had passed a tipping point and predicted softening prices over the next year. "One-off" increases in Chinese oil demand due to the Olympic games and power generation shortfalls were set to moderate in coming months, they added. The price of light crude oil for September delivery dipped to $112.48 a barrel yesterday in trading on the New York Mercantile Exchange before settling near $113 a barrel. @Email:[e-mail] * with agencies