IEA sees oil demand firming in advanced countries

Global oil demand is firming on surprisingly resilient growth in advanced countries, the IEA said yesterday, warning that uncertainties abound and Chinese thirst for energy is pivotal.

Two key factors which could upset estimates for the price of oil are strains over sovereign debt in advanced countries and the pace of growth in China where a "much-dreaded" slowdown has yet to materialise, the IEA said.

The effects of the BP oil-spill disaster in the Gulf of Mexico might curb oil exploration and production slightly in the medium term, the IEA said.

But it noted that a severe tightening of regulations after the Piper Alpha incident in the North Sea in 1988 had been followed by vigorous expansion of new fields.

The International Energy Agency revised up its estimate of global demand by 60,000 barrels per day to 86.4 mbd this year, saying initial data on economic activity in advanced countries was stronger than expected. On Wednesday, the Organisation of Petroleum Exporting Countries had held to its forecast that demand would rise by 95,000 barrels per day this year, putting global demand one million barrels lower than the IEA at 85.4 mbd.

The IEA said: "Today, short-medium term market trends appear to hinge on two main 'game changers' - the threat to global economic recovery from OECD sovereign debt issues and the sustainability of Chinese oil demand growth."

The trend of global economic growth posed big uncertainties "but a common thread is the strength of non-OECD demand and the predominance of China".

Any slowdown in the 31 advanced economies belonging to the Organisation for Economic Cooperation and Development "could curb export-driven Chinese oil demand growth," it said.

But "China is currently seen generating 40 per cent of 2010 incremental demand, now 1.7 million barrels per day, and nearly 45 per cent of 2010-2015 growth."

The report by the IEA, the energy monitoring and policy arm of the OECD, focused on how China's strategic thirst for foreign oil was now a fundamental factor in the global oil market.

"China's urgent need for energy supply to sustain economic growth and raise the wellbeing of its people has become a global market issue," it said.

In the last decade, the three main Chinese national oil companies, CNPC, Sinopec and CNOOC and other Chinese interests "have ramped up their upstream investment activities overseas".

The IEA said that "from January 2009 to April 2010 alone, they spent around $29 billion (€24 billion) worldwide to acquire oil and gas assets".

CNPC and Sinopec had also been involved in 11 loan-for-oil deals with eight countries worth $77 billion. And the Chinese companies were committed to investing at least $18 billion in exploration and development, "mostly in Iraq and Iran".

The Chinese companies had also emerged as significant forces in mergers and takeovers, spending $18.2 billion last year and accounting for 13 per cent of "total global acquisitions in 2009".

In the first four months of this year, the three majors had spent $10.9 billion in Canada, Australia and Argentina.

The IEA estimated that this had raised the foreign ownership interests of the three companies from 1.1 mbd of oil production last year to 1.5 mbd in the first quarter of this year. Chinese companies now had upstream interests in 31 countries and had ownership production interests in 20, the agency said.

The agency estimated that demand for oil in the whole of 2010 would rise by two per cent or 1.7 mbd from the level in 2009, driven almost entirely by demand from outside the OECD area.

The decline of oil production from the North Sea this year was set to be slower than expected, the agency said in its monthly assessment of trends, pressures and outlook for the oil market, having revised downwards its overall projections last month.

Oil prices dropped by $18 a barrel in the first three weeks of May, then rallied slightly, the agency recalled. On Thursday the benchmark price in Singapore edged up 23 cents to $74.61 a barrel.

In May, total oil supply fell by an estimated 575,000 barrels per day. Production from outside the Opec area fell owing to seasonal maintenance work on facilities.

But non-Opec output for the year was revised upwards by 100,000 bpd to 52.3 mbd. This meant that non-Opec supplies would grow this year by 800,000 barrels per day in addition to an increase of 800,000 bd from Opec.

Inventories held by OECD industry rose by 47.9 mb in April to 2,726 mb, representing 60.5 days of consumption, an increase of more than a day from the March level.