Era of cheap crude dead

OIL DEMAND: The IEA said world demand would be down this year due to slower economic growth and record prices. (Getty Images)

World oil demand will be less than expected this year because of slower economic growth in industrialised countries and record prices, the International Energy Agency (IEA) said on Tuesday.

The latest monthly report from the IEA adds to evidence that a slowing economy in the US and record oil prices above $100 a barrel are denting fuel consumption in some of the world's biggest economies.

But the IEA also said that the baseline for oil prices has moved higher and that only a severe world recession would send oil back below $60 a barrel for a sustained period. Oil has climbed from below $20 in early 2002.

"We are in an era of higher oil prices, and so if we look at $100 oil we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade," it said.

World consumption will average 87.5 million barrels per day (bpd) in 2008, 80,000 bpd less than the previous forecast, said the IEA, adviser to 27 industrialised countries. Demand in the Organisation for Economic Cooperation and Development (OECD) was cut by about 190,000 bpd.

"There's quite a big downward revision to demand in industrialised countries," Lawrence Eagles, head of the IEA's Oil Industry and Markets division, told newswire Reuters.

"Some of that weakness is related to slightly milder weather. There is also an effect from economic weakness and high prices."

Despite forecasting lower oil demand than expected this year, the IEA kept its 2008 estimate for growth in world oil demand little changed at 1.72 million bpd because of a revision to the previous year's figure.

The Paris-based agency also pointed to a rise in oil inventories in January and forecast a further increase in coming months following Opec's decision last week to leave supply unchanged.

Oil was little changed after the IEA report was released and later in the session hit a fresh record high over $109 a barrel.

Oil inventories in member countries of the OECD rose by 32.6 million barrels in January from an upwardly revised figure for December, the IEA said.

Opec supply will be 960,000 bpd higher than demand in the second quarter following its decision last week to leave output unchanged and assuming steady Iraqi supply, allowing inventories to rise further, the IEA said.

"Stock cover has improved but the market still seems to be tight," Eagles said. "We should see a partial replenishment of stocks over the second quarter."

World oil demand usually slows in the second quarter as consumers in the northern hemisphere use less heating fuel. In previous years, that slowdown has sometimes prompted Opec to cut production in the spring.

Opec pumps more than a third of the world's oil and produced 32.1 million bpd in February, 120,000 bpd less than in January, the IEA said. (Reuters)

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