Surging Demand, Weak Supply, and Dwindling Inventories, Drive Oil to Another Record High

By Jason Simpkins
Associate Editor

Crude futures closed at yet another record high yesterday (Wednesday) after government data showed a decline in crude inventories. The news followed a separate report from the International Energy Agency that said oil supplies would remain tight through 2013.

The U.S. Energy Department yesterday reported a decline of 2 million barrels in crude supplies last week. As a result, August crude climbed $2.60 to settle at an all-time high of $143.57 a barrel in New York.

In a separate report, released Tuesday, the Paris-based IEA, said supplies of crude would remain tight for the next five years, as surging demand from emerging markets overwhelms a softening in developed countries.

"Structural demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture over the medium-term," the IEA said in its Medium-Term Oil Market Report. "Poor supply-side performance since 2004, in the face of strong demand pressures from developing countries, has forced oil prices up sharply to curb demand."

Story continues below...

Since 2005, global oil production has remained stagnant, but demand has increased exponentially. But even if American consumers are unwilling to pay $4 a gallon for gasoline, and U.S. demand plummets, the IEA expects global demand will increase by 1.6% a year over the next five years, rising from 86.9 million barrels per day to 94.1 million barrels a day.

"Demand is coming from emerging markets. As long as the [United States] doesn't collapse, it doesn't really matter if the mature economies are slowing," Eduardo Lopez, an analyst with the IEA, told The Independent.

The Paris-based group expects demand in industrialized countries to decline by 0.7% (about 300,000 barrels of oil per day) this year, but says oil consumption in the rest of the world will grow by 3.7% (1.4 million barrels a day).

By 2013, oil demand in developing countries will account for nearly 49% of total global demand, the report said, compared with 36% in 1996.

The IEA sees China's oil demand more than doubling to 16.5 million barrels a day by 2030. But that's nothing compared to other emerging hot spots, where demand is expected to rocket sevenfold during that same stretch.

India, for instance, is expected to overtake the United States, Japan and China as the world's leading net importer of oil by 2025.

In 1970-71, India was importing 11.66 metric tons of crude oil. By 2005-06, however, the imports had increased to 99.40 metric tons, the Economic Times reported. Since 1997-98 alone, petroleum imports have almost tripled. Nearly 76% of India's domestic oil needs are met via imports.

India's demand for oil is expected to grow by 8% to 10% this year alone.

Together, China and India will account for 45% of the increase in global primary energy demand through 2030. The two countries' net oil imports are expected to jump from 5.4 million barrels in 2006 to 20 million barrels a day in 2030, which the IEA said could create a "supply crunch" as early as 2015.

While demand from emerging markets will continue to accelerate, the IEA has downgraded its expectations for Organization of Petroleum Exporting Countries crude capacity from 2008 to 2013, slashing its forecast by 1.2 million barrels per day.

"The report is only further confirmation of the inability of global supply to catch up with rising demands," Chris Ruppel, an energy analyst at Execution, an institutional brokerage firm told the New York Times. "After five years of record increases in oil prices, producers are still unable to sufficiently expand output. It means we are in for rough times."

News and Related Story Links: