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Oil demand rises on year-end growth spurt: IEA

by Staff Writers
Paris (AFP) Dec 10, 2010
Oil demand and prices are showing a year-end spurt, pushed by global growth and a surprising pick-up in advanced economies, but these pressures should ease in the medium term, the IEA said on Friday.

Strong growth in Asia remains the main driver of new demand for oil, but the International Energy Agency warned that inflation in China could unwind with a "hard landing".

Diesel was the key factor in the growth of demand, partly owing to the use of small generators and harvesting equipment in China. Another factor was rising demand for gasoline (petrol) for US motorists.

The world produced a record amount of oil in November, but despite this the unexpectedly strong demand raises the short-term price outlook, although the medium-term range looks steady at 75-85 dollars per barrel, the IEA forecast.

The benchmark price of oil rose by 32 cents to 88.60 dollars a barrel in Singapore on Friday.

"Recent harsh northern hemisphere weather, allied to electric power rationing in China, if sustained could push short-term demand, again largely gasoil/diesel, higher and tighten market balances further," the IEA said in its monthly report.

"However, cheap gas prices and an ongoing structural shift away from oil in industry and power generation, suggest the sensitivity of OECD demand in the event of cold weather is diminishing over time," the International Energy Agency said.

"Either way, global demand growth should ease in 2011, from 2.5 million barrels per day to 1.3 mbd, amid renewed structural OECD decline, and as post-recession froth in markets like China subsides."

The IEA, the energy policy and monitoring arm of the 33-member Organisation for Economic Cooperation and Development, said of the global outlook for oil demand: "Although economic concerns remain skewed to the downside, not least if current high prices begin to act as a drag on growth, more immediately demand could surprise to the upside."

Structural demand for oil in OECD countries was likely to fall in the years ahead and economic growth would weaken next year.

On an assumption that temperatures would revert to near to 10-year averages, the IEA said it was broadly holding to its medium range forecasts published in June but was raising its 2010-2011 baseline for oil demand by 1.1 mbd.

The IEA raised its global oil demand estimate for this year by 130,000 barrels per day to 87.4 million barrels per day, and for next year by twice as much, 260,000 bpd to 88.8 mbd.

The immediate outlook depends on OPEC holding its production levels steady at a ministerial meeting in Quito on Saturday.

A key force in the upsurge of demand is consumption of diesel, and also of gasoline (petrol) because Americans are increasing the numbers of miles driven.

"The resilience of US gasoline demand has been a surprise in recent months" but there were signs of "slower efficiency gains for the US vehicle fleet."

Chinese oil demand appeared to have risen by 12.6 percent in the 12 months to October from the equivalent previous period, or "roughly twice as fast as in September" when it had risen by 6.2 percent.

This "seemingly put to rest the widespread assumption that oil demand growth would noticeably slow down in the second half of 2010," the agency said.

This demand was being driven largely by "a surge in gasoil consumption ... driven by extensive use of small-scale electricity generators in order to circumvent closures of coal-fired plants imposed by local governments -- in a last-ditch effort to meet the country's ambitious targets to reduce energy intensity as the end of the 11th five-year plan (2006-2010) approaches."

This had led to "gasoil shortages in several provinces" exacerbated by increased demand for gasoil from the agricultural sector as the harvesting season begins."

The IA said that some observers "reckon that China may have become again a net gasoil importer in November for the first time in two years."

The IEA then warned: "The strength of China's oil demand is consistent with other indicators suggesting that the economy is in danger of overheating.

"Not only does GDP (gross domestic product) growth continue to hover around the 10.0 percent mark, but inflation is also creeping up."

Headline inflation of 4.4 percent in October "hides the fact that food prices have sharply risen ... which could herald rising domestic tensions if left unchecked."

Regarding oil demand, the key question was whether official action would curb inflation or "whether the government will be obliged to tackle the main cause of inflation, namely runaway bank lending and by doing so inadvertently engineer a hard economic landing."

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