Bulls in the oil market still have room to run around a price of $110 per barrel but growth of global oil demand is set to ease, the International Energy Agency (IEA) has said, tipping the seesaw price down again. The new estimates were based on assumptions that growth of the global economy would slow from 4.8 percent last year to 4.3 percent this year. This was ‘with the pace of slow-down being greatest for the OECD (Organisation for Economic Cooperation and Development area).’
The IEA, the energy monitoring and strategy arm of the OECD, said: “Our crude price assumption is near $110.” It said that the International Monetary Fund and others did not see this as ‘so high as to choke off economic recovery… just yet.’ Prices of above $100 dollars per barrel had occurred only since February and March and it would take time for the effects to become ‘entrenched’.
But the agency also said: “Persistently high prices at this stage of the economic cycle may ultimately sow the seeds of their own destruction.” It added: “Until then, the market confronts fundamentals that still look likely to tighten in the second half of 2011.”
Commenting on sharp falls in the price of oil at the beginning of May “during a broad commodity rout”, the IEA said that a faltering economic recovery, stronger dollar and speculative commodity sell-off were variously cited as underpinning the correction. Renewed concerns about the economic impact of high prices and shaky economic statistics from the US, China and Germany may have contributed to a degree of profit taking.
“But as the dust settles, prices have again begun to creep higher.” The IEA added: “The market bull run may have legs for a while longer.” In London, the price of benchmark West Texas Intermediate (WTI) oil dropped to $96.51 per barrel, recovering to $96.70 but down $1.51 from the closing price on Wednesday. The price of Brent North Sea oil for delivery in June fell by $1.01 to $111.56 a barrel.
VTB Capital commodities analyst Andrey Kryuchenkov told: “The IEA’s monthly report added some pressure.” The agency cut its outlook for global oil demand in 2011 by 190,000 barrels per day to 89.2 mbd. “Forecast global oil product demand growth for 2011 is trimmed on persistent high prices and weaker IMF GDP projections for advanced economies,” the IEA said, putting total demand in 2011 at 89.2 million barrels per day.
This was the first cut in estimated demand for 2011 since the IEA produced its first forecast in the middle of last year. Until now it had constantly revised its estimates upwards as recovery from the economic crisis broadened out. On the basis of its latest downwardly revised estimates, demand will rise from 87.9 million barrels per day in 2010, which marked an increase of 3.3 percent from the level in 2009, to 89.2 MBD this year, showing an increase of 1.5 percent.
The downward revision reflected mainly an easing of demand in North America where high prices were beginning to hit demand, the agency said, “ persistently high oil prices, despite the correction that occurred in early May, will likely induce moderate year-on-year declines through the remainder of the year,” said the IEA, putting the annual drop in demand at 0.8 percent. It expected a year-on-year drop in petrol consumption during the upcoming US summer driving season ‘if retail prices remain at current levels.’ Growth of China’s demand for oil accelerated in March following two months of slowing down, said the IAE, noting that coal shortages may force recourse to diesel generators, increasing fuel demand.
Overall the agency expected China’s oil demand to increase by 6.7 percent this year, after growing by 12.5 percent last year Global production of oil fell by 50,000 barrels per day in April. This reflected a continued downward trend for output by the Organisation of Petroleum Exporting Countries. OPEC output was 28.75 MBD in April or 235,000 BD less than in March and 1.3 MBD below the level in January. The IEA said that output by Libya had been ‘shattered’ by the effects of the ‘worsening civil war.’
