The International Energy Agency said Thursday that world crude oil demand this year is expected to officially enter its own recession of sorts, with oil consumption contracting for the first time in 25 years because of the deterioration in global economic activity.
Underscoring that bearish outlook, the Paris-based agency said spare production capacity - a key indicator of supply - now stands at a six-year high among Organization of Petroleum Exporting Countries members.
The IEA, in its widely watched monthly oil market report for December, forecast 2008 global oil demand to slide 0.2%, or 200,000 barrels a day, to 85.8 million barrels a day on average. The outlook, a downward revision of over 300,000 barrels a day from November, would represent the first demand contraction since 1983.
"The consumption numbers have just been coming in dramatically weaker, particularly in the U.S. It's very clear the weakness we are seeing," said David Fyfe, editor of the monthly report, adding crude demand forecasts may continue to be revised lower. The IEA is energy watchdog for Organization for Economic Cooperation and Development nations, including the U.S. and Japan.
The latest forecast wasn't unexpected, as other oil industry analysts have been projecting a drop in demand this year amid the economic recession conditions in the U.S. and elsewhere.
But the IEA remains more optimistic on demand next year than many other analysts, forecasting consumption to grow 0.5%, or 400,000 barrels a day, from 2008. By contrast, the U.S. Energy Information Administration earlier this week said it expects 2009 world crude demand to fall 450,000 barrels a day.
U.S. front-month oil futures traded more than $2 higher Thursday at $45 a barrel at 1105 GMT, but prices are still nearly 70% below their July peak of $147 a barrel. Demand weakness is most pronounced in the U.S., where consumption is expected to tumble 6.3% this year and 1.4% in 2009.
Consumption in China, the world's second-largest oil consumer by volume, is seen growing 5.3% to 7.9 million barrels a day, this year but weakening to 3.5% in 2009. That outlook is basically unchanged from November.
Because of tepid demand, oil inventories are well above their five-year average in OECD nations at 56.8 days of forward demand cover at the end of October, up from 55 days in September. Stocks are set to rise further, the IEA said.
OPEC nations, which produce about four out of 10 barrels consumed every day, would like to see forward demand cover, a measure of back-up oil supply, at 52 days. OPEC is widely expected to cut production by at least 1 million barrels a day at its final meeting of the year on Dec. 17 in Algeria.
OPEC's effective spare production capacity stands at 3.3 million barrels a day, the highest since 2006, as the group cuts output to halt the fall in oil prices. The group has so far reduced production by just 825,000 barrels a day, or 55% of the 1.5 million barrels a day members agreed to cut in October.
One note of supply pessimism is that production from Russia, the U.S. and other non-OPEC nations is seen falling 85,000 barrels a day this year due to increased drilling decline rates and project delays. The drop would represent the first since 2005 and is more than 1.5 million barrels below original IEA forecasts a year ago.