IEA Cuts Oil-Demand Outlook as Recession Lingers (Update1)

May 14 (Bloomberg) -- The International Energy Agency cut its oil-demand forecast for a ninth consecutive month, predicting consumption this year will fall the most since 1981 as the recession lingers.

The Paris-based adviser to 28 nations cut its global oil demand estimate “slightly” to 83.2 million barrels a day this year, down 3 percent from 2008, it said today in its monthly report. That is 230,000 barrels a day lower than it forecast last month. The revision comes a day after OPEC reduced its 2009 forecast, predicting oil demand of 84.03 million barrels a day.

“Demand continues to look very, very weak,” David Fyfe, head of the IEA’s oil industry and markets division, said in a phone interview from Paris. “Although there has been a lot of talk about the green shoots of economic recovery, we think it is still a little bit early to be flagging any start of a full blown recovery.”

Oil prices have climbed 34 percent this year, trading above $60 in New York this week for the first time in six months on increasing optimism about an economic recovery and record production cuts by the Organization of Petroleum Exporting Countries. Still, U.S. crude stockpiles remain near the highest since 1990 as the recession saps fuel demand. OPEC crude production is beginning to rise as higher prices encourage members to pump more than their quotas.

‘Very Weak’

Demand is weakest in the world’s most developed nations, where consumption will drop by 5.1 percent this year, the IEA said. The IEA cited “very weak” demand data in April for the U.S., and to a lesser extent, Europe.

Crude inventories in the industrial economies of the Organization for Economic Cooperation and Development are at their highest since 1993, according to Fyfe. Stockpiles were equivalent to 62 days of consumption as of the first quarter of the year, according to the IEA.

Iran’s OPEC governor Mohammad Ali Khatibi earlier this week said stock levels representing 52 days of consumption were a “healthy level.”

“The forward demand-cover level is very high,” Fyfe said. “The market structure is still supportive of a degree of stock- building. It is to do with oil for which there is scant demand at the moment.”

‘Sustained Weakness’

The energy adviser said it expects consumption in developing economies to contract for the first time since 1994 as China and Russia “continue to exhibit sustained weakness.” Demand in these economies will average 38.1 million barrels a day this year, a decline of 0.4 percent, or 140,000 barrels a day compared with 2008.

The IEA demand estimate is based on a forecast that global GDP will shrink 1.4 percent in 2009 and the world economy won’t start to markedly recover until 2010 at the earliest, it said. Should the world economy see “strong” economic recovery this year, the IEA’s oil demand could be “too pessimistic,” according to the group.

“If we get an economic bounce in the second half of the year, demand could be stronger than we are showing,” Fyfe said.

Non-OPEC supply will fall by 300,000 barrels a day this year, a second annual decline, to about 50.3 barrels a day. The IEA increased its forecast 50,000 barrels a day compared with last month because of “stable” supply from the North Sea and higher-than-expected Russian output.

Supply from OPEC rose for the first time in eight months in April as members backtracked on production cuts, according to the IEA.

Review Production

OPEC will meet May 28 in Vienna to review production quotas. It agreed in March to keep supply unchanged as members continue to implement reductions agreed last year, totaling 4.2 million barrels a day, to stem plunging prices.

The 11 OPEC nations bound by production quotas pumped 25.8 million barrels of crude oil a day last month, the IEA said, compared with their official Jan. 1 limit of 24.845 million a day. That means the group collectively completed 78 percent of its promised reduction, compared with 83 percent in March, the IEA said.

The IEA’s estimate is in line with OPEC’s own figure. The producer group said yesterday the 11 members implemented 77 percent of planned output cuts in April, down from 82 percent for March. Production rose to 25.8 million barrels a day, the group said, citing secondary sources.

Compliance

“There is a little bit of leakage vis-à-vis targets from Iran and a little bit from Angola,” said Fyfe. “Analysts are saying that with prices moving higher and cohesion fraying at the edges, it might be harder” for the group to reduce production again.

As global consumption weakens, OPEC needs to provide less oil to balance supply and demand. All 12 OPEC members, including Iraq, will need to supply about 27.9 million barrels of crude a day this year, the IEA report showed. That’s a reduction of 300,000 barrels a day from last month’s assessment.

Those same 12 OPEC members pumped 28.2 million barrels a day in April, 270,000 barrels a day more than the previous month, according to the IEA. Crude output in Saudi Arabia, OPEC’s biggest producer, was 7.95 million barrels a day in April, unchanged from March, the IEA said.