OPEC sees demand for its oil falling further

SHRINKING DEMAND: Sluggish pace of economic recovery likely to crimp demand for OPEC crude next year. (Getty Images)

Rival oil supplies and the sluggish pace of recovery in world consumption will shrink demand for OPEC's crude oil next year, the producer group said on Tuesday.

The Organisation of the Petroleum Exporting Countries also left its estimate of total world consumption this year and next unchanged, suggesting the outlook has reached a turning point after months of lowering forecasts.

Demand for OPEC crude will average 27.97 million barrels per day (bpd) next year, down 480,000 bpd from 2009, OPEC said in its Monthly Oil Market Report. It previously expected a fall of 380,000 bpd.

Oil prices are close to the high for the year around $70 a barrel, having more than doubled from below $33 in December, partly on optimism about economic recovery. But OPEC remained cautious about the strength of the rally.

"In light of weakening fundamentals, the sustainability of current prices will mainly depend on clearer signs of improvement in the global economy," the report by OPEC's economists said.

"If market expectations for an economic recovery are not fully realised, current price levels could face increasing pressure."

OPEC, which pumps more than a third of the world's oil, said world oil demand will fall 1.65 million bpd in 2009 before rising by 500,000 bpd in 2010 as economic growth returns. Both forecasts were unchanged from last month.

While fuel use in top consumer the United States remained weak, OPEC said increases in countries such as China and India were partly offsetting the reduction, leading to no overall change in the demand estimates.

OPEC was the first of three major forecasters to release monthly reports this week and it currently predicts a more modest recovery in global demand next year than others such as the International Energy Agency.

The US government's Energy Information Administration was due to issue its monthly update later on Tuesday and the IEA, which advises industrialised countries, is scheduled to follow on Wednesday.

OPEC expects China and the Middle East to drive the rise in oil demand next year. Consumption in the Organisation for Economic Cooperation and Development (OECD) group of industrial nations is still forecast to fall.

"When we look at the world economy, you are always looking at a more dynamic scene in emerging markets as they are more energy intensive," said Harry Tchilinguirian, senior oil analyst at BNP Paribas.

Late last year, OPEC agreed to cut output by 4.2 million bpd, equal to about 5 percent of daily world demand, as recession eroded fuel use and sent oil prices sliding.

As well as the small increase in world demand next year, higher supply from producers outside the 12-member group is expected to crimp demand for OPEC's oil in 2010.

OPEC said supply from non-OPEC countries would rise by 430,000 bpd in 2010, supported by higher output from Russia and revisions to historical data. The increase is 100,000 bpd more than previously forecast.

The report also pointed to a further erosion in OPEC's compliance with agreed supply cutbacks. OPEC, excluding Iraq, raised output in July to 26.20 million bpd, up from 26.09 million bpd in June, it said.

That reduced compliance with the supply curbs to 68 percent from 70 percent in June, according to Reuters calculations based on OPEC figures. Members often relax adherence to supply limits when prices are rising.

"When oil prices head up to these fairly firm levels the incentive to be disciplined with output deteriorates," Bill Farren-Price at Medley Global Advisors told Reuters Television on Tuesday.

"This will be the first thing for them to address if they feel they need to do more to balance supply and demand at the meeting in September."

OPEC meets to review supply policy on Sept. 9 at its headquarters in Vienna. (Reuters)

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