Higher oil demand threatens recovery, IEA says

World oil demand will rise to record levels in 2010, the International Energy Agency, the rich countries’ watchdog, said on Tuesday.

The IEA also warned that oil prices, which are trading at levels not seen since October 2008, were threatening the world’s economic recovery.

The organisation argues that higher fuel prices could hit particularly hard the developed economies where governments refrain from subsidising consumer fuel prices. They could “stall OECD economic recovery or render it more ‘oil-less’ than we currently envisage,” the IEA said in its most recent monthly market report.

This would ultimately lead to another price rollercoaster ride by “stunting economic recovery while prompting resurgent non-oil and non-Opec supply investment,” it said, referring to the oil producers’ cartel.

On the demand side, the IEA said the world’s oil need in 2010 would rise to higher levels than previously thought, with much of the growth from Asia and the Middle East. World demand will hit 86.6m barrels a day this year, up from 84.9m in 2009, and above the record 86.5m b/d demand of 2007, the report said.

Other analysts agreed. “Non-OECD demand is growing at a phenomenal pace,” said Amrita Sen, analyst at Barclays Capital.

China imported 4.95m barrels of oil a day in March, a 14 per cent increase from the previous month, according to data released by the Chinese customs bureau.

However, many analysts warned that the higher growth may not be sustainable because it is being driven by government stimulus programmes. Even the IEA acknowledged that prices may be higher than market factors justify.

“While some see recovering demand having been sufficient to support the $70-80/bbl prices evident in the last eight months, they nonetheless raise questions over the sustainability of prices markedly higher than those levels,” the IEA said.

Extra demand, increased activity by speculative commodity investors, and reduced supply by the Organisation of the Petroleum Exporting Countries, have all contributed to a quick rebound in oil prices.

Oil prices hit an 18-month high of $87 a barrel last week, and on Tuesday traded at $83.50 a barrel, down 0.8 per cent on the day.

The benchmark oil price has risen 150 per cent since December 2008. Traders and analysts say the latest move marks a decisive shift out of the $70-$80 a barrel range.

Opec has said $70-$80 a barrel was the “perfect” price – high enough to satisfy producers but low enough to avoid jeopardising economic recovery.

Additional reporting by Jack Farchy

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