IEA trims 2011 world oil demand & warns of oil price shock

16 March 2011 16 March 2011

BonTrade

The IEA has forecast in it’s latest monthly oil report that global oil demand will be lower than previously expected in 2011 as high oil prices begin to take effect on the global economy.

The IEA, which advises 28 countries on energy policy, also said OPEC’s oil production fell only slightly in February as OPEC member countries stepped in to compensate for the loss of Libyan crude oil output.

OPEC Spare Capacity at Three Year Lows

As a result of the ongoing situation in Libya, the IEA calculated that OPEC’s spare capacity has fallen to its lowest level since late 2008 (around 4 million barrels per day) thus reducing its ability to cushion any new world oil supply shock.

“Empirically, past oil price shocks have shown a discernible effect on GDP. Supply shocks tend to be felt just a few months thereafter, while demand shocks usually have an impact roughly a year later.” the IEA said in its monthly report.

The agency lowered its outlook for the global demand growth by 10,000 barrels per day to 1.44 million barrels per day.

“Even though limited volumes of regional production are affected so far, market perception that Saudi Arabian facilities, the bulwark of OPEC spare capacity, could be targeted, has brought the geopolitical risk premium back with a bang.” the report said.

IEA Oil Market Report – Highlights

Political unrest in the Middle East and North Africa, currently focused on Libya, has injected volatility into futures markets, with oil prices gyrating by an average $3/bbl daily. By mid March benchmark crudes were trading $10?15/bbl above average February levels, with Brent last seen just shy of $114/bbl and WTI around $100/bbl.

Global oil product demand growth remains largely unchanged at 2.9 mb/d in 2010 and 1.4 mb/d in 2011, but high oil prices entail significant downside risks to this year’s outlook. Baseline changes in non OECD Asia and stronger Middle East levels lift absolute demand slightly to 87.9 mb/d and 89.4 mb/d, in 2010 and 2011 respectively.

World oil supply rose to an all?time high of 89 mb/d in February, up 0.2 mb/d from January. Non?OPEC oil supply rose 0.3 mb/d to 53.2 mb/d on re?instated Alaskan output. 2010 non?OPEC estimates are left unchanged at 52.8 mb/d, while the 2011 forecast is raised by 0.1 mb/d, to 53.6 mb/d, on stronger?than?expected Canadian output.

OPEC crude oil output in February fell by 95 kb/d to 30.05 mb/d. A near 200 kb/d average monthly loss of Libyan supply was partly offset by higher production from Gulf states. OPEC’s ‘effective’ spare
capacity, excluding Libya, is now near 4.08 mb/d, its lowest since end?2008. The ‘call on OPEC crude and stock change’, revised up for 1Q11, is cut going forward, averaging 29.9 mb/d for 2011 overall.

Global refinery runs are expected to drop sharply through 1Q11 to reach a seasonal low of 73.5 mb/d in March, when refinery maintenance peaks, before rebounding to 75.3 mb/d in June. 1Q11 runs are forecast to average 74.6 mb/d (+2.0 mb/d y?o?y) rising to 74.8 mb/d (+1.0 mb/d y?o?y) in 2Q11.

January OECD industry inventories rose by 32.0 mb to 2 695 mb and forward demand cover increased to 58.2 days. Preliminary February data point to a sharp 43.4 mb decline, while oil in short?term floating storage grew by 8 mb.