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High oil prices ‘threaten economic recovery’

London, May 12, 2011

High prices are holding back oil demand growth and threaten economic recovery in the West, the International Energy Agency said on Thursday, meaning lofty crude prices could continue to topple.

The energy advisor to industrialized nations trimmed its global oil demand growth estimates to 1.29 million barrels per day, or 1.5 per cent, from 1.43 million bpd in its previous report.

"We clearly have seen demand growth slowing compared to last year's level and we're seeing it very much concentrated where the price feed through is most direct, notably in North America in terms of gasoline," said David Fyfe, head of the IEA's Oil Industry and Markets division.

Gasoline prices of near $4 a gallon in the US will lead to fewer road trips this year than last, the IEA said.

Preliminary March data showed a marked slowdown in global oil demand, although the IEA warned the data could be distorted by the devastating earthquake in Japan and the Easter holiday period.

"Persistently high prices at this stage of the economic cycle may ultimately sow the seeds of their own destruction. Until then, the market confronts fundamentals that still look likely to tighten in the second half of 2011," it said in the report.

This makes the Paris-based agency the most pessimistic of among leading industry forecasters.

The Organisation of the Petroleum Exporting Countries and the US Energy Information Administration converged on 1.4 million barrels, after the EIA cut its assessment on Tuesday.

Subsidies cushion the blow

The IEA said that worries about the economic impact of strong prices together with weak economic data from the United States, China and Germany had contributed to the profit taking which took oil prices down sharply over the last week.

"But as the dust settles, prices have again begun to creep higher," it said. "The market bull run may have legs for a while longer."

But demand from developing economies including China was likely to remain unaffected as government subsidies cushioned the end-consumer from strong outright prices.

"So long as you have price support in these emerging markets, you can still have robust oil demand growth even in the face of $100-plus oil," Fyfe told Reuters.

Chinese demand rose by 0.89 million bpd in March -- the single largest contributor to total non-OECD demand -- accounting for 74 perc ent of Asia's increased demand and 55 per cent of non-OECD growth.

"Governments in Russia, Brazil and China face difficulties fully passing on recent price rises to consumers, helping to sustain robust demand growth in the non-OECD countries," the IEA said.

Ahead of Opec's Vienna meeting on June 8, the agency said the cartel's supply of crude fell by 0.235 million bpd in April to 28.75 million bpd, due to lost Libyan output.

"Despite expectations that Opec would increase output to replace lost Libyan supplies, the group's production is now running 1.3 million bpd below the pre-Libya crisis level of 30.1 million bpd posted in January," the report said.

Although the agency said a formal Opec agreement to increase output at the June meeting was unlikely, it hoped an informal pact to increase production could emerge.

"Opec's apparently relaxed attitude towards increasing production to offset lost Libya supplies may also lead to sharply tighter markets later this summer once refiners are back in full swing, following extensive turnaround schedules," it said.

The IEA expected seasonal demand in the third quarter would mean a call for Opec's oil at 30.1 million bpd in that period.

Oil stockpiles in the Organisation for Economic Co-operation and Development fell by 9.2 million barrels to equal 58.8 days of forward cover. – Reuters




Tags: Opec | IEA | London | High oil price | Demand growth |

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