The most difficult prediction to make about the oil market is the reversal of current trends. Most faulty forecasts trip over the temptation to believe current trends endure forever.
Like all their predecessors, recent market trends-prices increasing as demand pushes against supply limits resistant to growth-won’t last.
The International Energy Agency’s Oil Market Report for July hints strongly that change, however gradual, is under way.
Oil inventories in industrial countries have returned to normal from precariously low levels of 2003-04. The market no longer consumes every barrel of oil as soon as it’s produced.
The largely price-induced changes in supply and demand that have brought this about are increasingly evident in IEA’s numbers.
For global average oil demand in 2005, the agency has trimmed its projection by 410,000 b/d to 83.8 million b/d. Part of the adjustment is to baseline demand. The overall cut in projected demand growth is 200,000 b/d-to 1.58 million b/d.
Notwithstanding the baseline change, IEA says, “The outlook for both Chinese and US demand growth is weaker.”
The projection for demand growth next year: 1.75 million b/d. After surging by 3.5% in 2004, therefore, global average oil demand in IEA’s view is returning to growth of 2%/year, normal for recent years.
The agency also reports signs of a supply-side response to elevated oil prices, noting “a marked uptick” in upstream activity. IEA says projects under development will add 1-1.5 million b/d/year to supply from countries outside the Organization of Petroleum Exporting Countries through 2009.
Much of the increment will be from projects planned before the price surge of the past 2 years. But IEA notes that high prices have accelerated some projects.
The agency projects increases in total non-OPEC supply to 51 million b/d this year and 52.4 million b/d in 2006 from 50.1 million b/d in 2004.
“The unfolding statistical picture increasingly reveals that fear of the unknown and the consequent desire to make forward purchases is behind oil’s higher price path,” IEA says.
As confidence grows in the inevitable market adjustment, that will change, too.
(Online July 15, 2005; author’s e-mail: [email protected])
