Oil watchdog cuts demand forecasts - Spare capacity to grow as recession bites

Oil watchdog cuts demand forecasts - Spare capacity to grow as recession bites
By Carola Hoyos
Copyright The Financial Times Limited 2009
Published: June 29 2009 10:05 | Last updated: June 29 2009 15:14
http://www.ft.com/cms/s/0/dffed620-648b-11de-a13f-00144feabdc0.html


The International Energy Agency, the energy market’s most important forecaster, on Monday significantly cut its expectations for medium term global oil demand, saying the recession had diminished the medium-term risk of a supply crunch.

The IEA, the consuming countries’ watchdog, now expects global oil demand to grow a paltry 0.6 per cent or 540,000 b/d in 2008-2014, pushing consumption from 85.8m b/d to 89m b/d. That is considerably less than the 1m b/d average yearly increase the IEA had expected last year. If the lower-end GDP forecasts turn out to be correct, oil demand could actually contract over the period, with consumption at 84.9m b/d in 2014, the IEA said in its medium-term oil market report.

This means the all-important spare supply cushion the Opec oil producers’ cartel holds is now expected to reach a healthy 7.67m b/d next year - or 8 per cent of demand - compared to last year’s forecast, which had foreseen rampant demand reducing that cushion to a mere 1.67m b/d.

After 2010, Opec’s spare capacity is expected to begin to decline again as economic activity perks up, the IEA’s data shows. But it is to remain well above last year’s forecast. For example, Opec spare capacity is expected to be 5.08m b/d in 2013, compared to last year’s forecast of 0.54m b/d.

This is important because a small Opec cushion of spare capacity drives up the oil price and can create massive spikes when supply interruptions, such as the frequent attacks on Iraq and Nigeria’s oil facilities, cannot be covered because Opec has too little spare extra supply to bring onto the market.

Despite the bearishness of the report Nymex West Texas Intermediate futures for August delivery rose 0.49 cents to $69.65 on Monday, while ICE August Brent gained 40 cents to $69.32. Traders ascribed the small increase to a new attack on a Royal Dutch Shell oil platform by The Movement for the emancipation of the Niger Delta, the most active of Nigeria’s militant groups.

In its report, the IEA cautioned restrained optimism about the recent sightings of “green shoots” of economic activity that have helped the oil price recover to around $70 a barrel from half that in February. The IEA said: ”The recent resurgence in economic activity could also simply reflect the rebuilding of depleted inventories across several industries, making it arguably premature to predict an imminent and strong economic rebound, not least because the elimination of spare capacity, the deleveraging of the private sector in several highly indebted countries and the rebalancing of global demand are still at an early stage.”

But Nobuo Tanaka, the group’s managing director, added in an interview that predictions were becoming fiendishly difficult to make.

“Already our assumptions, based on April IMF data, are getting old,” he said, noting that both the IMF and the OECD had recently come out with rosier growth projections. “If the economy grows much faster, the market could be much tighter and we could see much smaller spare capacity in 2014. On the other hand, another important element is structural demand,” he said, noting that recent changes in government policy, especially in the US, could lead to a scenario in which oil demand fell even as economic demand grew.

The global recession has not only hit demand. Supply, too, is being effected.

”Strikingly, compared with last year’s envisioned growth of 1.5m b/d in the medium term, total non-Opec supply is now projected to decline by 0.4m b/d from 2008 to 50.2m b/d in 2014,” the IEA said, citing as reasons deferred or cancelled oil field investments that make little profit when oil prices are relatively low, but costs of labour and equipment are still high.

If global GDP disappoints the decline could be as steep as 0.9m b/d, compared to last year’s forecast that foresaw a non-Opec supply increase of 1.5m b/d.

Much of the decline also comes from the production slowdowns of older fields, especially in Mexico, Russia, UK and Norway.

In Russia output is expected to fall 550,000 b/d compared to the previous forecast of a 50,000 drop, leaving various pipeline diversification routes potentially competing for oil.

Meanwhile, the much newer Canada oil sands are also struggling because they are expensive to produce. There the IEA slashed its growth forecasts by 70 per cent as projects that no longer make economic sense have been cut or delayed.

Opec is also feeling the consequences of the recession. Its capacity is now expected to expand 1.7m b/d to 35.8m b/d from 2008 to 2014, a downward revision of 1.5m b/d. While,

Saudi Arabia and the UAE will manage big capacity expansion projects, the IEA is less optimistic about Iraq, noting that its stated aim of boosting its production capacity to 6m b/d was too optimistic.