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Oil demand set to ease, high prices turn on stockpiling

PARIS, May 13 – Record oil prices and a slowdown in advanced economies are set to curb global oil demand despite growth in China and the Middle East, the IEA forecast on Tuesday, saying stockpiling was a key factor.

Demand from emerging economies might be set back if and when governments decide that fuel subsidies are unsustainable, the International Energy Agency added in its monthly report.

And it also provided figures showing a surge in production of biofuels.

On balance "despite continued strength in China and the Middle East, it would seem that the risks to demand (for oil) remain on the downside," the IEA said, asking "Do we need more oil?".

It commented: "While consumers may be adjusting to high oil prices, the full impact of current high oil prices in excess of 120 dollars per barrel, if sustained, has yet to be factored into either behaviour or forecasts."

It also said: "The most recent data and estimates suggest that the oil market should have been in surplus for the past two months and should remain in that position for the rest of 2008 — as long as OPEC maintains output at current levels."

A driving factor in the surge of oil prices recently to a record of 125 dollars (80 euros) per barrel was competition between users seeking to replenish oil inventories and users buying oil to meet immediate demand.

The Organization of Petroleum Exporting Countries, by deciding not to address the matter of inventories until September, had probably intended to send a message of stability to markets. But it had created instead a perception that it was happy with a price of 100 dollars a barrel or more and would not increase output.

This had ratcheted up the price baseline, the IEA surmised. A key factor "is one of stock levels and timing," the report said. "The market can only express its demand for higher stocks in a supply-constrained market through higher prices."

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If some players were determined "to build stocks they have to do so in competition with those who need crude to meet current demand."

But, forecasting "further downward adjustments to demand", the report said that one such factor which might emerge was the unwinding of fuel subsidies.

"Faced with the realisation that high prices may be with us for some time, several countries, such as Indonesia, are reassessing the budgetary reality of sustaining oil price subsidies.

"It will not be easy to unwind them," the IEA warned, saying that "many countries are wary of civil unrest, and may therefore try to cushion low-income earners with other payments."

But "when such shifts do come, they could cause temporary downward shocks to demand."

China, the IEA said, had recently decided to boost subsidies as a response to shortages, to ensure "that the domestic market is well supplied in the run-up to the Olympic games", but it said that the cost of this could be huge.

The agency said it now estimated world oil demand last year at 85.8 million barrels per day, an increase of 1.1 million barrels per day or 1.3 percent on the 2006 figure but 150,000 barrels less than the estimate in April.

Demand this year was not put at 86.8 million barrels per day, 1.0 million barrels or 1.2 percent more than last year but 390,000 barrels per day less than estimated in April.

For the area of 30 advanced economies covered by the Organisation for Economic Cooperation and Development, demand estimates had been cut sharply in the light of data for the first quarter.

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The estimates for North America, already cut sharply last month, had "turned out to be much weaker than expected, providing further evidence of the effects of the the economic slowdown and high prices." And fuel deliveries in Europe had been much lower than expected.

On the supply side, global supplies had fallen by 400,000 barrels per day in April from the March figure but a recovery of underlying supplies, begun in the last quarter of last year, was the strongest since early 2005.

OPEC supplies in April averaged 31.9 million barrels per day, which was 255,000 barrels less than an upwardly revised March figure.

The IEA put effective OPEC spare capacity at 2.3 million barrels per day.

This year, a fall in global demand would be bigger than a fall in supplies from non-OPEC producers. The effect would be to reduce demand for OPEC oil to 31.3-31.6 million barrels per day.

At the end of March, oil inventories held by industry were equivalent to 53.3 days of consumption, showing little change.

The report said that the production of biofuels would contribute 425,000 barrels per day to the growth of non-OPEC oil output this year from 270,000 barrels per day last year, taking the total supply of biofuels past 1.5 million barrels per day.

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