The International Energy Agency trimmed 270,000 barrels a day from its 2009 world oil consumption forecast Friday but warned that tightening oil supply dynamics could result in a swift drop in industrialized countries' oil stockpiles.
In its latest downward revision, the IEA forecast world oil consumption will drop to 84.4 million barrels a day, a drop of 1.2 million barrels a day, or 1.5%, from 2008, the agency said in its closely watched oil market report.
However, it cautioned that lower prices and the current credit squeeze pose a significant risk to supply, and warned that full adherence to the 4.2 million barrels a day of already announced Organization of Petroleum Exporting Countries cuts could quickly draw on global crude stocks, in spite of the IEA's latest demand revision.
Calculating that OPEC already has an 80% compliance rate with previous announcement cuts, full compliance by April and a hold thereafter would leave the Organization's output 1.6 million barrels a day below 2009 requirements, the IEA said. It added that OPEC had already removed 3.3 million barrels a day from the market between September and February. OPEC ministers are due to meet this weekend in Vienna, at which another production cut could be unveiled.
"When there is declining demand for oil, it may make sense for OPEC to curtail supplies on their part, but we think there is a risk they may go too far. One of our key messages would be don't forget that supply from non-OPEC is falling too," said David Fyfe, editor of the IEA report.
A 400,000-barrels-a-day downwards revision to non-OPEC output in the latest report offset the impact of the adjustment to the IEA's demand outlook, adding further importance to the outcome of OPEC's decision. Non-OPEC supply is now seen flatlining in 2009, with total supply kept steady at 56 million barrels a day.
Economic slowdown remained the proviso for a weaker demand outlook meanwhile, with continued contraction in the U.S. economy and signs of quickening in Russia's slowdown driving the IEA's downwards revisions to global consumption. Demand from the U.S., the world's largest consumer of crude, is now expected at 18.8 million barrels a day in 2009, down 3.5% from 2008 levels.
Meanwhile, developing countries aren't proving immune to the economic downturn. Chinese consumption was revised lower by 10,000 barrels a day from the previous report, and a "marked economic slowdown" in China led the IEA to downgrade its demand growth forecasts for China to 0.6% in 2009, from 0.7% a month earlier.
Aided by demand weakness, OECD countries' oil inventories have continued to rise, a development that is also likely to factor heavily in any OPEC decision on output.
The IEA projected OECD forward cover at 58.7 days in January, boosted by a revision to December stocks and an increase in January inventories. Last month the IEA reported December OECD stocks at 57 days cover. But preliminary data for February indicated a 2 million barrel drop in OECD oil inventories.
Meanwhile, volumes of crude held in floating storage stabilized between 50-55 million barrels in February, the IEA reported. Floating stocks remained close to that level entering March, as the gap between current and future prices deterred further buildups.
Crude prices traded higher following the report's publication. At 1217 GMT, the April light, sweet crude contract on the New York Mercantile Exchange was trading $1.10 higher at $48.13 a barrel.