IEA forecasts oil demand contraction... biggest decline since 1982

IEA is forecasting oil demand to contract this year. The contraction is expected to be the largest since 1981:

World oil demand this year will post the sharpest annual decline since 1981 as the economy struggles to bounce back, the International Energy Agency (IEA) said on Thursday.

Demand will contract by 2.56 million barrels per day (bpd) in 2009, the agency, which advises 28 industrialized countries, said in a monthly report. It previously forecast demand would contract by 2.4 million bpd this year.


As is obvious now, oil equities are down in the last year mainly due to this demand contraction. There were some who have suggested that there was irrational sell-offs in oil equities last year but it seems fundamentals back up the decline. Oil has rallied recently but IEA thinks it isn't based on physical demand:

The agency added a rise in oil prices, which topped $60 a barrel for the first time in six months this week, was due to sentiment and oil fundamentals remained weak.

Prices fell below $57 (U.S.) after the report was released.

“The oil price seems to have moved a bit higher in the past month largely on the basis of equity markets and sentiment about potential economic recovery,” David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters.

“But we're not seeing it in terms of the preliminary demand data for early 2009.”


Like most analysts, IEA cannot predict the future and is often wrong with their long-term forecasts. However their near-term forecasts, as well as their historical views, are worth paying attention to.

One question is whether this decline in demand is temporary or not. I think it doesn't matter much anymore. There is so much excess capacity on the sidelines with Saudi Arabia alone supposedly having 3 mmbd to 4.5 mmbd spare capacity by end of this year—consider this against Canada's total production of around 3.4mmbd—that price increases will be muted. If there is excess capacity, consumption growth may not matter. Oil consumption rarely ever declines on a worldwide basis, even during recessions. Except for the early 80's, oil demand never declined thoughout the bear market in oil from the mid-80's to 2000. Oil companies were cutting production and many went bankrupt in the late 80's to 2000, while consumption growth was positive but oil prices didn't really go up.

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3 Response to IEA forecasts oil demand contraction... biggest decline since 1982

MrParkerBohn
May 17, 2009 at 6:41 AM

I've just bought shares in Total (TOT) with money I've saved.  This supplements the Chevron (CVX) and Shell (RDS.A) shares I already own.
 
This is primarily a rebalancing of asset allocation, not an attempt to time the oil.  I bought CVX and RDS.A in late 2006, and have added several times to my account, but never bought any more shares in oil companies, partly due to the huge spike in oil prices.
 
The 3 combined are currently about 12% of my portfolio.
 
I expect oil prices to be very volatile, but I think the dividends paid by these companies will be less volatile.  Current dividend yields for these companies are considerably higher than gov't bonds, money market, CD's, or any form cash (investing in corporate bonds is outside my circle of competence).
 
I also view these holdings as 'insurance'.  In the event of an oil crisis, oil companies will fare much better than many other companies.

Sivaram
May 17, 2009 at 7:42 PM

I think your investment will be fine. I don't really follow oil companies anymore so I don't have a strong opinion on any of them. The supermajors will survive through any situation so the risk seems low. The real question would be wehther they will outperform other large-cap companies.
 
I think the only ones that should really worry about oil supply & demand or various other issues are macro investors or contrarians trying to buy something extremely undervalued. I have an interest in macro and that's why I mention some of these things. Passive investors or those diversifying into various sectors probably shouldn't worry about the daily supply & demand fluctuations.

Sivaram
May 17, 2009 at 8:13 PM

I don't know if you are from Canada or not but here is an article in the paper about Total that you may find interesting.

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