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Rising oil price harmful – Experts

LAGOS—The International Energy Agency yesterday revised its 2010 world oil demand forecast slightly higher, but warned that rising crude prices, if sustained, risk smothering the fragile economic recovery under way.

The Paris-based agency said it expects global oil demand to rise to 86.2 million barrels a day next year, representing an upward revision of 140,000 barrels a day from its previous monthly oil market report in October.

It said world crude consumption was on track to grow in the fourth quarter for the first time since mid-2008, mainly due to increasing emerging market demand.

Rising equity markets, a weak U.S. dollar — which has lured investors to put their money into oil and gold futures — and rising economic activity in China have been the main drivers of higher crude prices, which are up almost 80 per cent  this year at around $79 a barrel.

Major production cuts by the Organisation of Petroleum Exporting Countries (OPEC), the past year have been the biggest factor for higher prices, which have come despite a persistent overhang in oil inventory in industrialized nations since the start of the year.

But further gains in crude prices could bring trouble, the IEA said. “The recent price spike, if further extended, risks derailing the recovery. Not only that, but oil demand itself would rebound much more slowly were the price rally sustained into 2010,” it said in its report. The IEA serves as an energy advisor to industrialized nations such as the U.S. and Germany.

The agency kept its demand outlook on China, which accounts for much of the growth in world oil consumption, basically unchanged for 2009 and 2010 from its October report. China, the world’s No. 2 oil consumer at a distant second to the U.S. in terms of total consumption, is expected to burn on average 8.6 million barrels a day in 2010, or 290,000 barrels a day more than in 2009.

The U.S. is expected to use 18.9 million barrels a day next year, representing growth of just 0.4% after a contraction of 3.7 per cent expected this year. But supply is still more than ample. While starting to ease in recent months, oil inventory at the end of September in industrialized countries stood at 60 days of forward cover, a key metric of crude demand.

That is safely above the five-year average and compares with 60.9 days in August, the IEA said. OPEC has traditionally wanted forward cover at 52-55 days.

The exporting group has been pumping at a nine-month high of about 29 million barrels a day as some of its members, such as Iran and Nigeria, breach their obligations in order to gain more oil revenue.

While the group is still keeping plenty of supply off the market, OPEC compliance with big production cuts announced in late 2008 slipped to 61% in October.

That isn’t bad historically speaking for OPEC, but it means the group is supplying the world market with 1.6 million barrels a day above its production target, helping keep inventory ample.


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