U.S., OPEC cut world oil demand growth on economy

Global oil demand will grow less than previously projected this year, according to forecasts on Tuesday from the U.S. and OPEC, as a worsening economic outlook will curb consumption in developed countries.

The cut by the U.S. Energy Information Administration and a more pessimistic forecast by the Organization of the Petroleum Exporting Countries were in line with reductions by other forecasters such as investment bank Barclays Capital, as slowing growth hits consumers and businesses.

The reports come as grim economic news has stoked fears of another global downturn, with U.S. oil prices falling more than 15 percent since the start of last week in a sharp worldwide flight from risk.

"Dark clouds over the economy are already impacting the market's direction," OPEC said in its monthly report. "The potential for a consequent deterioration in market stability requires higher vigilance and close monitoring of developments over the coming months."

The EIA cut its forecast of world oil demand growth demand by a modest 60,000 barrels per day to 1.37 million bpd.

In contrast, OPEC, source for more than a third of the world's oil supply, saw demand growth down 150,000 bpd from its previous forecast, to 1.21 million bpd.

OPEC lowered its growth forecast for next year marginally, by 20,000 bpd to 1.30 million bpd, while the EIA raised its forecast for 2012 by 60,000 bpd, with consumption now expected to climb 1.64 million bpd next year.

The International Energy Agency, which will issue its outlook for world oil markets on Wednesday, currently predicts 2011 demand growth of 1.2 million bpd.

The full impact of increasing economic turmoil in Europe, along with the downgrade in the U.S. credit rating late last week, may not be fully reflected in these reports, analysts said.

"We've seen bouts of terrible economic data. Poor manufacturing data, the outlook for employment is not particularly great," said Matt Smith, an analyst for Summit Energy.

"There will be a correspondent effect on oil demand because of that. The U.S. is after all the largest economy in the world," Smith said.

Lower oil prices could prove stimulative in the long run for economies globally and help lower gasoline prices that have hurt U.S. President Barack Obama's efforts to boost the economy ahead of next year's elections.

PRODUCTION RISES

The weakening demand picture for 2011 could bolster the view of Iran and other price hawks within OPEC, who at a meeting in June blocked a Saudi Arabia-led proposal to increase output.

After the failed meeting, Saudi Arabia and other members including Kuwait and the United Arab Emirates unilaterally increased their production, helping OPEC output to rise to the highest in months.

According to secondary sources cited by the OPEC report, OPEC supply rose by 405,000 bpd in July to 30.07 million bpd. That is the same total as a Reuters estimate published on July 28.

An OPEC delegate told Reuters earlier this week that while the economic picture and slide in oil prices was a worry, there was no plan for the group to hold an emergency meeting. OPEC is not scheduled to hold a meeting until Dec. 14.

OIL MARKET TIGHTNESS

Despite reduced demand forecasts, both the EIA and OPEC still expect oil markets to remain somewhat tight throughout the rest of the year.

"Global oil demand growth, led by China, is expected to outpace the growth in supplies from countries outside of OPEC, leading markets to rely on both a drawdown of inventories and production increases in OPEC countries to close the gap," the EIA said in its report.

OPEC's economists forecast a gap between supply and demand in the second half of the year. Tuesday's report implied the supply gap had narrowed to 810,000 bpd in the second half from 1.25 million bpd in July.

Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, said it was significant OPEC was still pumping less than its own economists forecast the world will need and that demand outside the OECD remained largely on track.

"If economic forecasts have been downgraded in the United States and Europe, hitherto there has been no notable downgrade to the outlook in emerging markets, where oil demand growth ultimately takes place."

But, OPEC's figures did not account for the coordinated release of 60 million barrels of emergency oil reserves by industrialized nations earlier this summer, according to Tim Evans, an energy analyst for Citi Futures Perspective.

"We may run a slight surplus for the third quarter this year instead of a deficit," he said. "Everyone likes to look for oil market tightness behind every tree. But these forecasts suggest that we won't see any supply demand deficit before the second half of 2012."