IEA slashes world oil demand forecast

SLOWING DEMAND: Poor economic growth in the US has caused the IEA to cut its world oil demand forecast for this year. (Getty Images)

World oil demand will rise much less than expected in 2008 because of slower economic growth in the US and elsewhere, the International Energy Agency (IEA) said on Friday.

The cut to demand growth is the IEA's biggest since 2001 and follows the release of lower economic growth forecasts by the International Monetary Fund (IMF) this week, and the impact of high oil prices above $110 a barrel.

"The latest GDP projections from the IMF suggest less robust oil demand growth in the coming months," the IEA said. "This report projects April and May oil balances tipping towards a supply surplus."

Global oil consumption will rise by 1.27 million barrels per day (bpd) in 2008, 460,000 bpd less than the previous forecast, said the IEA, adviser to 27 industrialised countries, in its monthly Oil Market Report.

Even though demand is expected to be lower, supply is also rising less than forecast, which could help to keep prices high. The agency cut its forecast for supply outside the Organisation of the Petroleum Exporting Countries (Opec).

Oil prices rose after the IEA report was released, but later steadied. US crude, which hit a record high of $112.21 this week, was trading at $110.11 by 1218 GMT, unchanged from the previous close.

Lower demand in members of the Organisation for Economic Co-operation and Development (OECD) accounted for the bulk of the IEA's reduction. The IEA cut forecast OECD demand this year by 320,000 bpd to 48.9 million bpd.

The IMF trimmed its prediction for 2008 economic growth for top oil consumer the US to 0.5% from 1.5%. China, the second largest, was also expected to use less oil than anticipated.

The cut in demand growth brings the IEA's view closer to that of Opec, which expects an expansion of 1.2 million bpd this year and has rebuffed calls from consumer countries for more oil to lower prices.

Demand for oil, by contrast with other energy forms, is regarded as inelastic because of a lack of viable alternatives for transport, but high prices have helped to change consumption especially in the US.

"A bit of demand shift is going on there, which is related to price... The price has probably a more significant impact on consumers who are feeling the pinch," said Lawrence Eagles, head of the IEA's Oil Industry and Markets division.

This month's cut in demand growth was the largest since the agency lowered 2001 demand growth by 509,000 bpd in July 2001, he said.

The IEA said weaker demand might not translate into lower oil prices given supply risks in countries such as Nigeria and Iraq. Oil rose in the second half of 2007 even though inventories were also climbing, it noted.

"That perhaps explains why, in the face of weakening economic growth, prices continue to remain high: there is concern that projected stockbuilds may not materialise, or may not be high enough."

The IEA trimmed its forecast for oil supply outside Opec this year and said OECD oil inventories fell by 49 million barrels in February and preliminary figures showed only a small increase in March.

Supply from non-Opec, which pumps about three in every five barrels of oil, was expected to rise by 815,000 bpd this year, less than world demand growth and down 90,000 bpd from the previous forecast, the IEA said.

Non-Opec supply has missed expectations in recent years, contributing to rising oil prices. (Reuters)

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