The International Energy Agency Thursday revised up its forecast for world oil demand for the third consecutive month, citing stronger-than-expected economic growth in developing Asian economies and North America.
The crude price rose almost $1 to over $72 a barrel immediately after the release of the IEA figures, which came hours after the Organization of Petroleum Exporting Countries decided to keep its oil output unchanged at a meeting in Vienna.
At 0939 GMT the price of October U.S. light sweet crude had pared its gains and was up 57 cents at $71.88 a barrel.
Global oil demand in both 2009 and 2010 is now expected to be 500,000 barrels a day higher than organization's August estimate, at 84.4 million barrels a day and 85.7 million barrels a day respectively, the IEA said.
"Economic prognoses from the OECD and IMF are being revised higher, while baseline oil demand in the U.S., China and other Asia appears to be running stronger than preliminary estimates suggested," the Paris-based organization said in its monthly report.
OPEC ministers echoed the IEA's increasing optimism, saying they see a brighter outlook for oil consumption in Asia. "I am more confident today than what I was back in May" about China's economic recovery, Saudi Oil Minister Ali Naimi said.
"We're looking East more these days," Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah said.
However, the IEA cautioned that rich country demand is set to remain weak for the remainder of the year and the true extent of the demand rebound in China is obscured by massive stock building there. "It's difficult to discern the true strength of Chinese demand at the final consumer level," said the report's editor, David Fyfe.
Despite the increase, projected oil consumption this year will still be down 1.9 million barrels a day, or 2.2% lower, compared with last year, reflecting the still weak economy.
In August OPEC was still pumping significantly above its output target as some members continue to exceed their quotas, the report said. Excluding Iraq, which isn't subject to quotas, OPEC supply in August was 26.3 million barrels a day, 1.4 million barrels a day above the group's target.
OPEC acknowleged Thursday that compliance with its target of 24.9 million barrels a day is only 68%-70% and behind the scenes in its Vienna meeting members pledged to improve their adherence to existing output quotas.
The report also highlighted high stock levels in heating oil and diesel ahead of the winter as a potential drag on the oil price. "Some 60 million barrels of products, mainly middle distillates, are being held in floating storage, largely off Europe," the report said.
How the winter heating season plays out will be a key factor in future OPEC decisions, said Fyfe. "They would be looking for winter (demand) together with greater (quota) compliance to whittle into that stock overhang," he said.
Non-OPEC oil supply forecasts were unchanged from last month's report, although Fyfe said there could be "revisions to non-OPEC suppply numbers for the second half of the year if we get through the Hurricane season unscathed."