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Oil Demand Forecasts to Fall As World GDP Slides


The world's top energy forecasters look set to cut further their estimates of oil demand for this year as the global economy slips towards its first contraction since World War II, analysts say.

The International Energy Agency (IEA), which advises 28 industrialized countries, is due to publish its closely watched monthly report on March 13 and it tends to reflect estimates for world economic growth by the International Monetary Fund.

The IMF has steadily cut its 2009 growth forecasts and is bracing for global economic shrinkage this year, as bank lending stalls, factories close and unemployment rises.

The Organization of the Petroleum Exporting Countries is also due to release its monthly Oil Market Report on March 13 and it too will almost certainly slash demand forecasts.

A packed week for data sees the release of the U.S. Energy Information Administration's monthly report on March 10 and this may also contain a cut in its demand forecast.

OPEC oil ministers meet in Vienna on March 15 and oil demand estimates will be key to their decision on how much oil to pump. Some member countries, including Iran, Venezuela and Libya, have already raised the possibility of a further production cut.

"Keep your eyes on actual and forecast levels of global GDP (gross domestic product). It is a proxy for oil demand," said David Hufton, managing director of brokers PVM.

"The dreadful GDP figures being revealed for the fourth quarter all over the world are not just dry, sterile data to be yawned at. It is the sum of what is going on in various economies and is a key indicator of health."

Last month, the IEA forecast world oil demand would contract by 980,000 barrels per day (bpd) this year to 84.7 million bpd.

The IEA projection followed a cut by the IMF in its estimate for global GDP growth to just 0.5 percent for 2009.

That estimate now looks optimistic. It is conservative compared with U.N. trade and development agency UNCTAD, which has predicted a global contraction of 1 percent this year.

"NEGATIVE TERRITORY"

A senior IMF official said this week the agency was likely to move its global growth forecast "into negative territory".

"It makes it highly likely the IEA will move further," said Catherine Hunter, oil analyst at Global Insight.

David Dugdale, analyst at MFC Global Investment Management, is cautious about the scale of the cut in oil demand estimates but believes the trend is clear: "I think the bias has to be towards further cuts to demand forecasts."

The collapse in demand has profound implications for OPEC, which said in February world oil demand would fall by 580,000 bpd in 2009 to average 85.13 million bpd.

The contraction in oil demand has pulled oil prices down from a peak of almost $150 a barrel in July last year to around $45 this week, squeezing the budgets of OPEC producers.

OPEC has promised to cut output by 4.2 million bpd from its output level in September in an attempt to prop up the market, but Hufton says "OPEC's supply cuts are being outrun and outgunned by the speed in the fall of global demand".

Hufton believes the big oil forecasters will reflect recent downgrades in growth estimates in their demand forecasts: "I assume that we will see additional demand reductions varying between 500,000 and 1 million bpd for 2009 depending on the GDP growth rates that were included in their last reports," he said.

But the timing of revisions is unclear to many analysts.

Lawrence Eagles, head of commodities research at JP Morgan and a former IEA analyst, suggests the IEA may wait for the IMF to cut its GDP estimates, something that could happen in April:

"IMF officials have talked about downgrading economic forecasts, but no changes have been published. Expect fact to win over rhetoric," Eagles said.