Opec will need to sustain production at its current level of almost 30m barrels a day if badly depleted oil inventories in the developed world are to be rebuilt, according to the International Energy Agency.
In its widely followed monthly report, the west’s energy watchdog said stronger than expected demand in the US and other industrialised nations had drained oil stocks to the lowest level in five years, tightening the market and supporting prices.
Oil inventories in the OECD group of countries dropped by 1.5m barrels a day in the last three months of 2013, the steepest quarterly decline since 1999.
“Far from drowning in oil, markets have had to dig deeply into inventories to meet unexpectedly strong demand,” the report said.
Rising oil production from North America has led many forecasters to predict a supply glut and a decline in oil prices this year. But a recovery in demand in Europe and the United States and supply problems in a number of Opec countries have supported prices.
West Texas Intermediate, the US oil marker, has risen more than 9 per cent over the past month, while Brent, its international counterpart, has gained almost 2 per cent.
In the past few days, both Opec, which produces around a third of the world’s oil, and the US Energy Information Administration have both upped their global oil demand growth forecasts because of unexpectedly strong demand in the developed world.
The Paris-based agency now expects world fuel demand to expand by 1.3m b/d to 92.6m b/d in 2014, a 50,000 b/d increase on its previous forecast. It sees the ‘call’, or demand for Opec oil, averaging 30m b/d in the second half of the year.
“At this time of year, when the global oil market enters a season of lower demand, it is common for market participants to worry about excess supply or the perceived need for Opec production cuts,” the report said.
“Such concerns today would be particularly misplaced, as the market needs to replenish exceptionally low stocks.”
The IEA said the “unexpected” market tightness reflected a “resurgence” of OECD demand growth, which rose 370,000 b/d and 300,000 b/d respectively in the third and fourth quarters of last year.
US oil demand rose by more than that of China last year, the strongest indication yet of how abundant energy supplies are driving an economic resurgence in the US.
While some of the factors supporting oil prices, such as freezing temperatures in the US, would prove short lived, the IEA said others would prove more long lasting.
“US demand strength likely reflects, in part, a structural response to the country’s supply bounty, namely a revival of manufacturing and petrochemical activity,” the report said. “It may be some time before Libya sorts out its problems and brings back supply to pre-civil war levels.”
The bounce back in OECD demand more than offset lower consumption in developing countries caused by turmoil in emerging market currencies. While non-OECD economies are still expected to overtake OECD countries in oil demand in 2014, the IEA now expects that to happen later in the year.
“The negative impact upon non-OECD oil demand stems from the associated increase in the cost of doing business, as interest rates have been hiked in many countries in an effort to defend domestic currencies.”