Worst appears to be over for oil market - OPEC

OIL STOCKS: OPEC agreed last year to cut 4.2 million bpd. (Getty Images)

Oil demand is still shrinking as the world economy contracts, OPEC said on Friday, but the worst appears to be over for the oil market and stocks should be moving back towards more normal levels by the end of the year.

The Organization of the Petroleum Exporting Countries again cut its forecast for world oil consumption this year, seeing a year-on-year fall of 1.62 million barrels per day (bpd) to 83.8 million bpd, and it said its own output rose slightly in May.

But it said a seasonal increase in demand and its own efforts to restrict supply should gradually reduce the overhang of oil stocks in the market, which have been near record levels.

"The worst appears to be behind us," OPEC said in its Monthly Oil Market Report. "Inventories appear to have peaked."

OPEC said its oil output, excluding Iraq, rose to 25.90 million bpd in May, up from 25.78 million bpd in April.

Oil prices have had a turbulent year, hitting an all-time high of over $147 per barrel in July 2008 before plunging towards $32 in December but then more than doubling.

Benchmark US light crude oil futures were trading around $71.50 per barrel at 02.45pm, UAE time on Friday.

OPEC agreed last year to cut 4.2 million bpd, equal to about five percent of daily world demand, from its output levels in September in an attempt to support prices.

OPEC said its efforts to curb excess supply had helped turn the market around and will reduce global oil inventories.

Although OPEC reduced its forecast for global oil demand this year, predicting consumption in 2009 would be 1.62 million bpd below 2008 levels, compared with a previous forecast of a fall of 1.57 million bpd, its forecast was above the most recent projection by the International Energy Agency (IEA).

The IEA, adviser to 28 industrialised countries, on Thursday forecast global oil demand this year at 83.3 million bpd, down 2.47 million bpd from 2008.

Demand has been falling quickly in the developed nations of the Organisation for Economic Co-operation and Development, but there are increasing signs that the downturn is moderating.

OPEC said its own oil output increased in May by 0.12 million bpd to 25.90 million bpd.

The rise in OPEC output meant the group moved further away from its goal of reducing output, complying with 75 percent of its pledged supply cuts in May, versus 78 percent in April, according to Reuters calculations based on OPEC data.

But analysts said even this level of compliance should ensure a reduction in global oil stocks by the end of this year.

"If OPEC can hold output steady they are going to get pretty significant stock draws in the second half of this year," said Mike Wittner, global head of oil research at Societe Generale.

The producer group, which pumps more than a third of the world's oil, held its output quotas steady when it met in Vienna on May 28.

It saw demand for OPEC oil this year falling by 2.19 million bpd from 2008 to around 28.60 million bpd, with the biggest decline in the second quarter of the year and a slow recovery towards the end of the year. (Reuters)

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