Crude Oil Prices Tumble as IEA Warns Economic Woes Could Stunt Demand

Oil prices yesterday (Wednesday) fell below $80 a barrel after the International Energy Agency (IEA) warned that demand could be curtailed if global economic growth is weaker than expected.

The warning came even as the IEA, an energy adviser to 28 industrialized countries, slightly increased forecasts for global crude demand for this year and 2011.

However, those projections were based on revisions to historical oil-demand data and on forecasts issued by the International Monetary Fund (IMF) nearly four weeks ago. Since that time, economic news in the United has become gloomier.

The U.S. Federal Reserve said after its policy meeting on Tuesday that the pace of economic recovery had slowed in recent months and was expected to be "more modest in the near term" than previously thought.

"Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months," the Federal Open Market Committee said.

The central bank announced that it would reinvest the proceeds from expiring mortgage-backed securities into longer-term U.S. Treasuries. The move should help a sputtering growth by keeping mortgage rates low.

Total demand for oil this year could rise by 1.8 million barrels per day (bpd) or 2.2% from last year to 86.6 million bpd the IEA said. Demand would increase by an additional 1.3 million bpd, or 1.5%, to 87.9 million bpd in 2011.

But there is a "significant" risk to the latest upgraded forecast for oil demand, based on lower demand in developed economies, which could result in an overall slight net decrease in 2011, the IEA said. The Fed's latest statement was issued after the IEA had already compiled data for Wednesday's report.

The IEA, the oil strategy and monitoring arm of the 31-member Organization for Economic Co-operation and Development (OECD), based its demand figures on the supposition that the global economy will grow by 4.5% this year and about 4.3% in 2011.

If those rates are off by 30%, world oil demand would be expected to slide by 300,000 barrels a day this year and by 1.2 million barrels a day in 2011, the IEA said.

"We stand by our baseline assessment for a recovery in oil demand, but there remains a lot of economic uncertainty in the short term and we recognize that," David Fyfe, head of the IEA's oil markets team told The Wall Street Journal.

The U.S. government on Tuesday also modestly boosted its forecast for global oil demand growth this year and next, saying the growth of emerging economies would drive consumption even if the U.S. economy experiences slower growth.

In China, an industry association forecast 11% growth in the country's demand for crude this year. However, in July the country's oil demand slowed from double-digit growth in the first half as firms scaled back refinery output and crude purchases from June peaks.

Economic growth in China is slowing slightly, although it remains the world's fastest growing economy even as the government reins in lending.

"The report concurs with our view that global demand growth is slowing in the key economies, and that doesn't bode well," Sabine Schels, energy strategist at Bank of America Merrill Lynch, told Foxbusiness.com.

"So the recovery is stalling, but it's unlikely that we will get a double-dip recession," he said.

Fyfe called the oil-demand projections "what-if" scenarios aimed at simply demonstrating the downside risks and the outlook for oil prices was also therefore "uncertain," he told The Journal.

The price of light, sweet crude oil for September delivery closed down $2.23 at $78.02 per barrel in trading Wednesday on the NYMEX exchange.

In its annual report on the oil and gas markets for 2010, the IEA projected that oil prices through 2015 will be less volatile than in 2008 when they swung wildly between $147 and $37 per barrel. Prices should remain in a range of $65 to $85, the agency said, with an average price of $76 per barrel.

In order to more accurately make price projections, the agency called more transparency on hidden subsidies that are prevalent in emerging markets.

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