IEA increases crude demand outlook

Sam Fletcher
Senior Writer

The International Energy Agency on Mar. 11 raised its global oil demand forecast by 330,000 b/d to 84.3 million b/d for 2005, a 2.2% annual growth rate, because of "very cold weather in late February and early March, a more robust view of US economic growth, and the impact of this and other factors on China's oil demand growth prospects."

As a result, IEA increased its estimate of the call for crude from the Organization of Petroleum Exporting Counties by 200,000 b/d from its last projection to a total 28.6 million b/d this year, with the addition being "most pronounced in the first half of 2005 before higher non-OPEC output takes effect." That means upward pressure on crude prices is likely to continue as supplies tighten.

Even so, other analysts claim IEA remains well behind consensus estimates of demand growth and supply pressure. IEA acknowledged cold weather and strong demand pushed crude prices to record levels well above $50/bbl in early March. It said distillate and jet fuel prices also strengthened around the world, particularly in Asia and Europe where temperatures were below seasonal norms.

Among member nations of the Organization for Economic Cooperation and Development, commercial crude stocks fell by 3 million bbl to 2.6 billion bbl in January, up by 66 million bbl from year-ago levels. World crude production rebounded by 885,000 b/d to 84.3 million b/d in February, with non-OPEC producers accounting for 445,000 b/d as a result of "recovering North American and North Sea supply." Russian output rose after a 4-month decline, IEA said.

It revised estimates of non-OPEC production up by 75,000 b/d in 2004 and by 90,000 b/d to an average 51 million b/d in 2005, which would be 925,000 b/d above estimated 2004 production.

Record prices
Despite a build in US inventories and a persistent discount for front-month crude futures contracts, benchmark US light, sweet crudes topped $55/bbl in early March on the New York Mercantile Exchange. US gasoline prices hit record levels on NYMEX, while "noncommercial positions reached 8-month highs," IEA said. "Recent cold weather can go some way to explain the relentless climb in prices, but after a 6-month lull, fingers have once again been pointed at speculators."

IEA said, "Rightly or wrongly, oil is dominated by a US-centric focus, which does not appear to explain the recent price rise." However, it said, the recent rally "makes more sense" from a global perspective. "The latest OECD data show that, while US stocks were building in January, crude inventories were drawing in Europe and to a lesser extent in the Pacific-Asia region," IEA said.

"Cold weather in the northern hemisphere has caused a surge in demand. Heating fuel prices have tightened globally, but more significantly in Europe and Asia. Frigid temperatures spread throughout Europe in mid-February, causing consumers to increase purchases. In contrast to a mild 2004, north East Asia has also been very cold, particularly Japan, contributing to rising kerosine and low-sulfur fuel oil prices."

High energy prices are not simply a weather phenomenon, however. Singapore gasoline prices are up because of a reduction in exports from South Korea and China and strong regional demand. The global market for kerosine jet fuel has strengthened because of the general tightness of the distillate market and increased air travel. US refiners, gearing up for the driving season, are switching to harder-to-produce summer fuel specifications.

"The reality is that oil consumption has caught up with installed crude and refining capacity. Refiners are already competing to secure crude for the second quarter to rebuild depleted distillate stocks and to meet summer driving season and air conditioning demand. Capacity limitations once more are being tested by strong demand growth, keeping prices high," IEA reported.

Strong US, China demand
Recent economic indicators indicate the momentum from strong US economic growth in 2004 will carry through the first half of 2005, said IEA. "This will be reflected in continued growth in industrial demand, gasoline consumption, and strength in imports from key exporters such as China, which will increase demand for transportation fuels," the agency said. It expects the strong US economy to sustain Chinese manufacturing and exports.

IEA projects US demand will grow by 1.7% in the first quarter of 2005, 1.6% in the second quarter, and 1.7% in the third quarter before slowing to 0.9% growth in the fourth quarter as a result of an expected US economic slowdown in the second half of 2005.

(Online Mar. 14, 2005; author's e-mail: samf@ogjonline.com)


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