The Hindu Business Line : Oil market tightness to continue, says energy body

Mumbai, July 1 Market fundamentals are the main underlying factor behind high oil prices and with record production by OPEC and no unusual build up in stocks, demand in key emerging markets will continue to result in market tightness , according to Medium-Term Oil Market Report issued by International Energy Agency (IEA).

Refinery limitations

Demand for oil in the developed countries (OECD area) has been weakening.

But it has been largely neutralised by supply constraints, refinery limitations and continued demand growth. This is expected to maintain pressure in the market for some time. There is possibility of spare capacity in excess of four million barrels a day (mb/d) developing in the next few years because of supply growth from new project start-ups during 2008-2011 period and weaker economic growth; but this expansion may slow down from 2011 onwards when global demand growth is projected to recover, the report pointed out.

Bio-Fuels

On bio-fuels, IEA conceded that although supply will grow from 1.35 mb/d in 2008 to 1.95 mb/d by 2013, announced capacity additions may be difficult to Achieve, given available feedstock and growing concerns due to rising food prices.

Global demand for oil products is projected to grow by an average of 1.6 per cent a year to 2013, from 86.9 mb/d in 2008 to 94.1 mb/d.

Weakest growth

Contrary to supply trends, demand growth will be the weakest in the first two years of the period, but will start building as global growth strengthens from 2010 on.

“Developing countries will drive demand growth, their total consumption equalling that of mature economies by 2015”, the IEA said, adding, Asia, West Asia and Latin America will account for nearly 90 per cent of demand growth over the five-year forecast period.

Not due to speculation

Reuters reports from London:It is easy to blame speculation for the doubling of oil prices over the past 12 months, but the real reasons are strong demand growth, coupled with shortages of supply and refining capacity,IEAsaid.In its Medium-Term Oil Market Report, the International Energy Agency (IEA) said there was little evidence that speculation had distorted prices over both the longer and shorter term, although it noted a lack of data on inventory levels, as well as on financial market participants.

“Blaming speculation is an easy solution which avoids taking the necessary steps to improve supply-side access and investment or to implement measures to improve energy efficiency,” the IEA concluded.

Perhaps the most important driver is the strain on supplies of distillates, which include diesel and heating fuel.

Another ingredient in the rally is the weakness of the U.S. dollar, which has had an impact on oil priced in dollars, but oil denominated in other currencies is also close to records, showing other factors are boosting prices, the IEA said.

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