Oil supply crunch looming

World oil demand will rise faster than expected to 2012 while supply lags, the International Energy Agency said yesterday, leading to a tighter market than previously anticipated.

In its Medium-Term Oil Market Report, the adviser to 26 industrialised countries said demand will rise by an average 2.2 per cent a year between 2007 and 2012, up from a previous medium-term forecast of two per cent.

The outlook, which updates an IEA forecast last issued in February, coincides with a jump in oil prices to more than $75 a barrel, closing in on a record high near $79, on concerns of a tightening market.

"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010," the IEA said.

"It is possible that the supply crunch could be deferred - but not by much."

The IEA's previous Medium-Term report, published in February, called for world demand growth of two per cent a year between 2006 and 2011.

It now expects global demand to reach 95.8 million barrels per day from 86.1 million as of this year. The forecast assumes average global GDP growth of 4.5 per cent annually.

The Paris-based IEA also said additional global refining capacity over the next five years will lag earlier expectations as rising costs and a shortage of engineers delays construction.

It also said world production of biofuels would reach 1.75 million bpd by 2012, more than double 2006 levels, but the fuel will remain marginal as economics hobble further growth.

The report points to a greater reliance on the 12-member Organisation of the Petroleum Exporting Countries, source of more than a third of the world's oil.

While foreseeing higher demand, the IEA expects less supply to come from producers outside Opec and the agency also trimmed a forecast for the group's unused production capacity.

"A stronger demand outlook, together with project slippage and geopolitical problems has led to downward revisions of OPEC spare capacity by two million bpd in 2009," said the report.

The forecast assumes no net expansion of capacity from Iran, Iraq and Venezuela and that the 500,000 bpd of Nigerian production that has been shut for a year will not reopen during the next five years.

The IEA in its Monthly Oil Market Report has for the past four months urged Opec to open the taps to lower prices.

Opec says crude supply is sufficient and blames other factors, such as a strain on oil refineries, for high prices.