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. Tags: energy