IEA sees strong oil demand into 2010

World oil demand should grow strongly over the next five years despite high prices, straining the supply chain as developing countries burn more, the International Energy Agency said yesterday.

The IEA, adviser to 26 industrialised nations on energy policy, forecast that demand will grow at an average of 1.8 to 2.0 million barrels per day (bpd) through 2010.

"Several key non-OECD oil consumers, such as China, are in a phase of rapid energy-intensive industrialisation," the IEA said in its monthly Oil Market Report.

"This should contribute to relatively robust oil product demand growth... even if prices remain high relative to historical levels."

US light crude was down one cent yesterday, but prices were still strong at $61.29 a barrel.

The rapid demand growth through 2010 may test the global supply chain in 2007 and 2008, which will be lean years for new oilfields coming on line, the IEA said.

"In 2007-2008 we'll be treading water," said Lawrence Eagles, head of the IEA's oil market division. "The supply cushion is likely to be holding constant as we see relatively strong growth during this period."

Demand growth in 2004 of 3.0 million bpd was the highest for a generation, taking oil markets by surprise, eating into spare capacity and helping fuel a rally that has seen prices double in the past two years.

The Organisation of the Petroleum Exporting Countries is set to boost its spare capacity to 3.1 million bpd by the end of 2006, but that might not be enough to convince oil market players that there is a sufficient cushion to deal with any surprise supply problems.

"In the shorter term, while an increase in Opec capacity through to the end of 2006 is comforting, stronger growth and continuing bottlenecks elsewhere in the value chain leave little room for unpleasant surprises," the IEA said.

Opec will need a strong rebound in supply growth from non-Opec oil producers such as Russia to ensure it builds that cushion. Non-Opec supply growth in 2006 is forecast to rise to 1.4 million bpd from just 110,000 bpd in 2005.

This year has seen the lowest non-Opec growth for six years amid rapid decline in the mature North Sea region and almost stagnant output from Russia.

The IEA expects non-Opec output growth to mostly come from ex-Soviet countries, Brazil, Angola and Canadian oil sands.

Even if non-Opec suppliers hit the target, demand for Opec crude was set to rise to 28.5 million bpd in 2006 from 28.4 million bpd in 2005, the IEA said.

This is the first time the IEA has included medium-term forecasts in its monthly report.

Less than a month ago, oil producers led by Saudi Arabia requested a "demand road map" from oil consumers.

The request turned the tables on consuming countries that had been pressuring oil producers to increase oil output and make more details of planned future capacity hikes public.

The IEA raised its 2006 demand forecast by 130,000 bpd from last month to 1.79 million bpd. That was the highest the IEA has seen demand since it first forecast next year's growth in July. Growth in 2005 was set to come in at around 1.18 million bpd.

Hurricanes Rita and Katrina, followed by unseasonably warm weather in the northern hemisphere in October and early November hit demand growth in the second half of 2005.

But that effect was expected to be temporary, and US product demand was expected to begin showing year-on-year growth again in December, the IEA said.

Mr Eagles said even demand growth in 2005 could be revised higher, as there were some 1.2 million bpd in the third quarter that the IEA accounted for as miscellaneous which could include increased demand when more complete data was in.

"That could be unreported supply or stocks," Mr Eagles said. "But we suspect an element in there is unreported demand."

The extreme volatility seen in world oil demand from 1998 to 2005 was likely to continue and may even increase, Mr Eagles said.

Changes in GDP growth forecasts would lead to revisions in medium-term demand growth expectations, he said.