IEA Cuts 2009 Oil-Demand Forecast

By SPENCER SWARTZ LONDON -- The International Energy Agency on Friday cut its 2009 world oil demand forecast by a hefty 1 million barrels a day from earlier projections and said the global economic recession could yet force further reductions to consumption. The Paris-based agency, in its monthly oil market report, said it expects global oil demand this year to slump to 83.4 million barrels a day on average compared with previous estimates. That is 2.4 million barrels a day, or almost 3%, below 2008 consumption levels. David Fyfe, the editor of the report, said the IEA made the revision, which follows many others from past months, after cutting its world economic growth forecast. It now expects the global economy to swing to a contraction of 1.4% versus 2008 from earlier estimates for a small expansion. "The big story is still demand. When we look to the medium term, we [the IEA] are going to have to take a very long, hard look at how much demand has been destroyed. We could be headed for more weakness," Mr. Fyfe said. The IEA acts as a sort of energy advisor to the U.S. and several other industrialized nations. Its monthly oil-market forecasts tend to shape market perceptions about industry trends. The agency's latest forecast is likely to frustrate further moves higher in crude oil prices, which are up roughly 15% this year at about $52 a barrel in the U.S. Efforts by the Organization of Petroleum Exporting Countries to sustain higher prices are also likely to be thwarted. OPEC has slashed production by around 3.4 million barrels a day since September, according to IEA estimates, but oil inventory is still brimming at almost 20-year highs in the U.S. and elsewhere, even with those OPEC cuts. OPEC, whose 12 members are under increasing financial strain from weak oil prices and reduced production, is scheduled to meet again May 28 to review its production policy. Mr. Fyfe said one driver of the latest demand revision was how weak consumption was in the first quarter, down around 700,000 barrels a day from earlier expectations. Most of the total 1 million barrel-a-day downward demand revision came from weakness in big oil-consuming nations like the U.S., though sluggish consumption is clearly deepening in emerging markets like China, the world's second biggest oil consumer after the U.S. China's oil consumption -- previously expected to register small growth in 2009 -- is now expected to fall by almost 1% for the first time in 19 years, Mr. Fyfe said. Demand in other emerging markets is forecast to drop by 0.1% for the first time since 1994. The expected contraction in 2009 global oil demand will mark the second year in a row consumption has fallen, but the IEA said at this point, it doesn't expect a repeat of the four-year consecutive drop in demand seen in the early 1980s. The damage the global economic recession is doing to investment in drilling projects is growing more pronounced. This has deepened market fears that once global economic recovery and energy demand take hold -- perhaps by late 2010 -- oil prices will steadily drift higher. The IEA said it expects drilling project investment this year to drop close to 20% compared with 2008 as small and medium-sized companies short on financing cut their budgets. Underlining that development, the agency thinks around 1 million barrels a day in gross oil pumping capacity previously expected to enter service this year and in 2010 has been delayed or canceled, with much of that in non-OPEC nations. Actual oil output in the U.S. and other non-OPEC states is expected to fall by 320,000 barrels a day this year compared with a previous forecast for output to be about flat. Much of that revision stems from decreases in ethanol and other biofuel production as weak oil prices undermine biofuels' economic viability. Write to Spencer Swartz at spencer.swartz@dowjones.com