Oil market faces volatile year: IEA

Agence France Presse

Paris, January 19:

Global demand for oil will remain strong in 2005, led by China and Asian countries, the International Energy Agency (IEA) forecast today, while warning that unexpected events could crimp supply.

The agency also estimated that OPEC producers had so far cut production by about half of the one million barrels per day agreed from January to sustain prices from March. Meanwhile the oil industry was waiting to see if oil prices remained high before committing to long-term and complex investment programmes to increase production all along the chain of supply. The IEA, an offshoot of the Organisation for Economic Cooperation and Development (IECD), commented, “Fourth-quarter demand was stronger than expected in North America, Europe and China, but weaker in OECD Asia, India and the former Soviet Union. Growth is set to slow in 2005, but will still be led by China and non-OECD Asia.”

The IEA noted that oil prices had been ‘extremely volatile’ at the end of 2004. The 10 members of OPEC, excluding Iraq, had agreed to cut production by one million barrels per day from January to bring real output closer to the target of 27 million barrels per day.

The report began with a page headed ‘A cautionary note’, saying that demand had surged by 3.3 per cent last year, at more than twice the expected rate, the fastest growth since 1976. And growth of supply had been disappointing with non-OPEC production rising 1.4 million barrels a day instead of 1.9 million barrels as forecast.

“Most forecasters, the IEA included, expect oil demand growth to slow in 2005 from the torrid pace of 2004. But what happens if it doesn’t,” the agency asked in a series of questions about the capacity of producers to supply, and in response to peaks in demand. Key producers had said they would increase oil exploration activity but the huge capital investment required would cut into social and economic programmes. Oil companies had also increased development budgets but years of cost-cutting had taken a toll. “Years are needed to plan, engineer and construct a new grassroots refinery and ship construction yards are booked out years in advance,” the report stated.

As growth of the world economy slowed in 2005 a lagging effect of high prices should slow demand pressures. Otherwise demand would continue to exceed supply, increasing price volatility. “With continued geopolitical uncertainty surrounding Russia, Iraq, Iran, Nigeria etc, it is all the more important that investment in supply and infrastructure anticipate and meet growing demand,” the IEA warned. Recent experience showed that random events “may cause supply losses of between 300,000 and 400,000 barrels per day for non-OPEC supply.” The IEA said that the decision by OPEC to cut production by one million barrels a day from January was widely seen as being intended to prevent a build-up of crude in consuming markets from March.

However the agency commented: “Initial indications are that production cuts so far in December and January may amount to 50-60 per cent of the pledged one million barrels.”

The report also commented that recent industry surveys suggested that major oil companies were not yet banking on prices remaining high and were being cautious about increasing investment.