Oil Demand Set for 2-Year Drop on Recession, IEA Says

By Grant Smith

Jan. 16 (Bloomberg) -- Oil demand will fall for a second year, the first back-to-back contractions since 1983, as a deepening recession erodes consumer spending, the International Energy Agency said.

The adviser to 28 nations cut its global 2009 forecast by 1 million barrels a day on expectations the economic outlook will deteriorate. The IEA estimates consumption will shrink 0.6 percent to 85.3 million barrels a day. Forecasters including OPEC, JPMorgan Chase & Co. and Deutsche Bank AG have already said demand will fall this year.

“It’s a major shift,” said Gareth Lewis-Davies, an analyst at Dresdner Kleinwort Group Ltd. in London who worked at the IEA. “The weakness in oil demand is significant. This year there will be a lot of attention on their forecasts and they don’t want to be accused of being behind the curve.”

Oil prices have plunged more than $100 a barrel from a record in July as the U.S., Europe and Japan face their first simultaneous recessions since World War II. This month’s IEA revision is its largest since at least 1996.

“The major institutions including the International Monetary Fund are in the process of revising down their forecasts and this month we’ve tried to pre-empt that,” David Fyfe, head of the IEA’s oil industry and markets division, said in a telephone interview from Paris. “It’s fairly certain the IMF will make a downside revision.”

China’s Economy

Forecast demand in the industrialized countries of the Organization for Economic Cooperation and Development was cut by 530,000 barrels a day to 46.3 million barrels a day. Demand in developing countries, while revised down 480,000 barrels a day, will still expand 1.8 percent to 38.9 million barrels a day, the IEA said.

“China’s economy, in particular, appears to have sharply slowed down as its main export markets tumble,” the report said. Chinese consumption is expected to climb 1.3 percent to 8 million barrels a day. That’s 300,000 barrels a day less than previously forecast.

The agency cut its assumptions for 2009 global economic growth in half to 1.2 percent. Last year oil demand fell 0.2 percent to 85.8 million barrels a day, according to the IEA.

Yesterday, the Organization of Petroleum Exporting Countries forecast global demand of 85.66 million barrels a day and said consumption of its own crude will fall 4.2 percent this year to 29.5 million barrels a day.

OPEC, responsible for more than 40 percent of the world’s oil, will have to provide about 29.9 million barrels a day this year to balance supply and demand, the IEA said, 900,000 barrels a day less than estimated in the previous report.

Supply Targets

At its last meeting in December, OPEC agreed to a record 9 percent reduction in supply targets, to take effect Jan. 1, extending two earlier resolutions to constrain production. The 11 members bound by quotas were within 2 percent of these at 27.7 million barrels a day as of last month, the IEA said.

The whole organization pumped 30.9 million barrels a day of crude oil in December, 330,000 barrels a day less than in November, the IEA said. Saudi Arabia, OPEC’s biggest producer, cut by 450,000 barrels a day last month to 8.45 million barrels a day, according to the agency.

This week Saudi Arabia said that next month it will curb output by more than was announced at the Dec. 17 summit in Algeria.

The IEA also trimmed its forecast for supplies from outside OPEC next year by 30,000 barrels a day to 50 million barrels a day, leaving a growth rate of 1 percent. Non-OPEC supply fell last year for the first time since 2005 to 49.5 million barrels a day because of disruptions in the Gulf of Mexico and Azerbaijan.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net