World's demand for oil to fall as recovery falters, says IEA

While the fall in oil prices will be welcomed, the fact that it has been precipitated by a slowdown in the pace of economic recovery is less happy news

Fears over the global economic recovery prompted the International Energy Agency (IEA) to give warning of a sharp slowdown in the growth of oil demand yesterday.

The agency's monthly oil reportrevealed demand growth shuddering to a halt in June as high prices and slowing economic growth "dramatically curbed" energy needs worldwide.

"The relative calm of oil markets in July was shattered by the collapse in global financial and commodity markets in early August," the IEA said.

"The spectre of a sharp slowdown in economic growth near–term, particularly in the US, is prompting some industry forecasters to cut global oil demand estimates for this year and 2012," the agency added, pointing to high oil prices, sovereign debt and fiscal uncertainty sapping consumer confidence in the developed world, and anti-inflationary monetary tightening in developed economies.

So far, the IEA itself has made only minimal adjustments to its headline forecasts. It yesterday cut this year's estimate by 60,000 barrels per day (bpd) to 89.5 million bpd, largely on the basis of the weaker appetite in evidence in China and the US. And next year's estimates were even tweaked slightly higher – up by 70,000 bpd to 91.1 million bpd – on the expectation of rising need from post-tsunami Japan.

However, in response to "emerging economic storm clouds", the IEA has sketched out a scenario of lower global GDP growth slashing 2012 oil demand growth by more than half. In such a case, the call on crude from the 12-country Opec oil producers' cartel would drop below 30 million bpd, the IEA said.

The drop in demand is alreadyhaving a marked impact. Oil prices have dropped by as much as $15 since the beginning of this month alone, and the prices are set to slide lower still as the extra crude from Opec's supply boost comes through.

Opec supply rose by 115,000 bpd to 30.1 million bpd in July in an attempt to offset prices sent rapidly skywards by the Libyan crisis, with Opec heavyweight Saudi Arabia at its highest production levels for three decades.

Despite the promise of respite for cash-strapped consumers – in particular motorists – lower oil prices are not untrammelled good news, according to the IEA, which gave warning they were a symptom of a wider problem.

"Lower energy input costs are well and good, but not if they are achieved at the cost of another economic crisis," the agency said.

"Arguably, political paralysis has played a greater role in the currentsituation than has the financial sector. Either way, earlier bullish oil market prognoses are having to be hastily re-examined," it added.

The IEA's characterisation of recent developments as "reviving all the old clichés about rollercoaster volatility", came the day after oil prices slumped to six-month lows and then bounced back up to more than $105 per barrel in a single session. Yesterday saw the price touch $103 before rebounding.

Earlier this week, Opec revised its demand forecasts downwards for both this year and next, warning of "dark clouds over the economy".