Oil demand set to slip, will prices follow?

By Malini Hariharan

The International Energy Agency (IEA) has once again trimmed its oil demand forecast for 2011. And rising fears of a sustained global economic slowdown have also prompted the agency to cut the forecast for 2012.

The IEA made it clear that expectations of ‘business-as-usual’ 4.5-5% global GDP growth were unsustainable. It cut its own assumption of GDP growth to around 4% in 2011-12 and as a result trimmed 2011 oil demand by 400,000 bbls/day to 89.3m bbls/day while demand in 2012 was forecast at 90.7m bbls/day.

The IEA acknowledged the ‘paradox of weakening economic growth and oil demand indicators on the one hand, and $110/bbl crude on the other’.

“This is a market that’s been tightening for the past 12 to 15 months. This year the tightening has been more about supply outages than demand. Demand growth has slowed,” said David Fyfe, head of the IEA’s oil industry and markets division, in an interview.

But he expected tightness to ease in the coming months if there were no further disruptions to supply.

Availability should significantly improve once Libya is back in action. But when will this happen is still unclear.

“We are using a fairly conservative assumption for Libya. Until we see a resolution of the security situation on the ground, we would prefer to be cautious on the resumption of oil supplies,” said Fyfe.

Oil prices were quick to react to the IEA forecast with Brent falling to $112.39/bbl immediately after the announcement.

A further softening cannot be ruled out and this would only enhance the bearish sentiment seen in most petrochemical markets.

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