Sanguine on Iran, IEA trims oil demand forecast

The IEA trimmed its forecast for oil demand growth because of gloomy economic prospects, but said yesterday that markets were taking in their stride tougher international sanctions on Iran.

The International Energy Agency cut its forecast for growth in oil demand this year of 0.8 million barrels per day (mbd) from 1.1 mbd after the International Monetary Fund slashed its estimate for global economic growth in 2012 to 3.3 per cent from four per cent.

The IEA was largely sanguine about the impact of tighter international sanctions on Iran, including an EU import ban which takes effect in July. “Despite tougher new sanctions by the international community, the market is largely still taking the situation in its stride,” said the IEA, which is the energy monitoring and policy forum of the OECD, in its monthly review.

It said “the market in 2012 likely has sufficient supply-side flexibility to adjust to any loss in Iranian volumes” given Opec space capacity and expected new sources.

And while “perceptions of impending supply issues are clearly placing a floor under oil prices for now”, said the IEA, it has been a severe cold snap in Europe that has driven Brent crude prices to six-month high levels in early February.

World oil prices fell sharply in late morning London deals on the IEA report and profit-taking, traders said, with Brent North Sea crude for March tumbling $1.33 to $117.26, after having struck the day before its highest level since August 1.

New York’s main contract, West Texas Intermediate (WTI) light sweet crude for delivery in March, sank $1.09 to $98.75 a barrel.

The new forecast of global oil demand of 89.9 mbd by the IEA, which represents industrialised consuming nations, is slightly higher than that of the Opec oil producers’ cartel, which trimmed its 2012 demand forecast on Thursday to 88.76 mbd.

The IEA said global oil supply rose by 0.1 mbd in January to 90.2 mbd with gains in Opec countries offsetting a 0.2 mbd drop in non-Opec producers.

It said Opec crude oil supply rose 30.9 mbd in July, the highest level since October 2008, as Libyan oil continued to return to market following the conflict last year, while Saudi Arabia and the UAE kept up output.

It noted the level was 0.9 mbd above the 30.0 mbd target set by OPEC ministers in December.

The IEA also noted recent Saudi comments that it could increase output quickly by over 2.0 mbd, more than amply making for the 1.0 of 2.6 mbd of Iran’s output that could be affected by sanctions.

Other Opec nations are expected to add 0.85 mbd of new production this year and non-Opec nations to increase production by 1.0 mbd, it added.

“The prospect of adequately supplied crude markets through 2012 is therefore lessening concerns over European and Asian customers finding suitable alternatives,” said the IEA.

It said the process of finding alternatives had in fact already begun, but said that transportation could become an issue as the sanctions are “muddying the waters for the tanker industry.”

Not only are insurers demanding risk premiums for vessels calling at Iranian ports, it noted “talk of insurers shying way altogether from providing cover for vessels that have recently called at Iranian ports” for fear of falling foul of sanctions.

The IEA also said that it expects US regulators to ultimately consider most energy market derivatives trading by banks as allowable under the proposed Volcker Rule “and therefore we anticipate limited impact on liquidity in energy markets.”

The IEA has repeatedly expressed concern over recent months that proposed tighter US regulations on financial institutions could have unintended consequences on energy markets as banks are party to most trades in energy derivatives.