PARIS, February 13 – World oil markets are unexpectedly tight as growth in advanced economies picks up, the IEA warned on Thursday, urging OPEC to skip a seasonal output drop as stocks touch six-year lows.
Analyst have warned of an oil glut and drop in prices for months.
But the International Energy Agency said a pick up in demand in advanced countries, led by the United States, has more than compensated for a slowing of emerging market demand.
The IEA, energy market analysis arm of the OECD group of advanced democracies, put much of that switch down to the rebound in the United States and the tightening of US monetary conditions which has sparked turmoil in emerging markets.
While much has been made of an apparent slowdown in Chinese growth, the IEA said this was only part of the story.
“The real surprise has been the recent resurgence of OECD demand growth,” said the IEA in its regular monthly report.
Although it expects the 34 OECD nations to resume its gradual decline, the IEA expects overall demand growth to accelerate this year in line with the broader economy
It pushed up its forecast for 2014 global demand to 92.6 million barrels per day (mbd), an increase of 125,000 barrels per day.
Meanwhile, the IEA said global oil supply has been disappointing, chiefly due to problems in OPEC, with hopes dashed for a sustained increase in Iraqi production.
The result has been surprisingly tight markets.
“Far from drowning in oil, markets have had to dig deeply into inventories to meet unexpectedly strong demand,” said the IEA.
It noted OECD commercial stocks plummeted posted their steepest quarterly decline since 1999 at the end of last year, leaving stocks at the lowest since 2008.
The IEA noted that at this time of lower seasonal demand market participants often worry about excess supply and feel the need for OPEC production cuts.
“Such concerns today would be particularly misplaced, as the market needs to replenish exceptionally low stocks,” said the IEA.
It warned that OPEC, which supplies 35 percent of global crude, should produce well above the benchmark measure of the market’s need for its output if badly depleted inventories are to be rebuilt.
The IEA left this “call” on OPEC supply at 29 mbd in the first quarter of this year, but raised it slightly to 30 mbd in the second quarter.
It said global supplies slid by 290,000 barrels per day in January to 92.1 mbd, mostly due to non-OPEC producers, but this was still a 1.5 mbd gain from the previous year.
OPEC output edged up to 29.99 mbd in January, while non-OPEC supplies fell by 390,000 barrels to 55.64 mbd.
Tapering the culprit
The IEA highlighted the recent switch in oil demand trends, with emerging markets slowing and advanced picking up.
In the final quarter last year, growth in oil demand in non OECD economies slowed to around 1.6 percent year on year, less than half its previous five year average of 3.6 percent.
Meanwhile, in advanced economies saw oil demand pick up by 0.7 percent year-on-year, rebounding from the average decline rate of 1.6 percent over the past five years.
This trend is largely being driven by “the apparent acceleration of the US economy to a point where the exceptionally loose monetary policies carried through recent years might no longer be deemed necessary.”
Even before the US Federal Reserve announce announced in December its first $10 billion cut in its $85 billion per month of bond purchases, the prospect of a cut in monetary stimulus roiled global markets.
A slump in several emerging market currencies last year forced cash strapped countries to cut back on oil subsidies, thereby cutting demand, but the second cut $10 billion cut announced in January prompted a number of countries to hike interest rates.
The IEA said that while pressure to reduce subsidies remains, “this time the largest likely additional impact upon oil demand is expected to be through the detrimental effect of higher interest rates on economic growth.”