IEA Sees Relief for Energy Consumers

Source: The Wall Street Journal 10/12/2012, Location: Middle East

More oil supply and weaker demand over the next five years suggests oil prices will ease for consumers, the International Energy Agency said.

The agency warned that heightened geopolitical risks to the supply of oil will remain a fact of life, but its forecasts suggest that life for oil consumers struggling with high fuel prices will gradually improve.

The IEA, which represents the interests of energy-consuming rich countries, forecast in its medium-term oil market report that global oil production capacity will grow to 102 million barrels a day by 2017, well above its demand forecasts of 95.7 million barrels a day.

The Paris-based agency forecast a significantly slower increase in oil demand than previously expected due to the steady decline in the economic picture over the past year. Oil demand in developed countries is expected to keep contracting while emerging market growth "looks somewhat less robust than previously expected," the IEA said.

Global oil demand is expected to grow at an annual average of 1.1 million barrels a day over the next five years, compared with a forecast of 1.2 million barrels a day made six months ago.

The IEA sees global oil output growing faster thanks to significant production gains in North America, Libya and Iraq. It now forecasts average annual supply growth in the coming years of 1.5 million barrels a day, compared with its previous forecast of 1.3 million barrels a day.

This increase will be accompanied by a major shift in trade flows. In the U.S., product exports are expected to increase in line with rising production, though recent reports that BP PLC and Royal Dutch Shell PLC have applied for export licenses make it more likely that the U.S. may also export some crude, said Matt Parry, a senior IEA oil market analyst.

Oil imports to the U.S. are set to decline sharply, with the Western hemisphere becoming increasingly self-contained while flows of oil to Asia continue to increase.

Significant infrastructure investment is necessary in order to realize these changes, the IEA said.

"Bringing oil to market involves a very dramatic increase in logistics," said Antoine Halff, editor and head of the oil industry and markets division at the IEA. A "tremendous effort" is required to meet market needs, though much work is already under way, he said, noting an increase in pipeline building in the U.S.

The combination of lower oil demand and more comfortable levels of supply is expected to reduce the demand for oil from the Organization of the Petroleum Exporting Countries, allowing the group to increase the buffer of spare capacity it holds and which provides some insurance against unexpected supply disruptions.

The low level of OPEC spare capacity available to the market, of 2.8 million barrels a day, has contributed to nervousness over supply and helped oil prices rise to near-record highs earlier this year. The IEA now forecasts that OPEC spare capacity will more than double over the next five years, to between 5 million and 7 million barrels a day.

Political turmoil in the key producing region of the Middle East that has kept oil prices elevated over the last two years will continue to be a factor through 2017, potentially undermining the benefit of improved supply, the IEA said.

"The clear increase in capacity does not mean oversupply," said the IEA's Mr. Halff. "There are very heightened levels of risk in the market and the experience of last two years has clearly shown that the perception of risk is not just abstract but very real."

Western sanctions against Iran are assumed to remain in place throughout the forecast period, eroding the country's production capacity by more than 30% compared with 2011, the IEA said.

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