International Energy Agency revises oil demand upwards

The International Energy Agency’s monthly report for January revised this year’s oil demand forecasts.

The upward revision comes on expected increased demand in China and the Caspian regions. With the revision, the IEA anticipates the 2007 world demand to increase by 1.8 percent.

On the supply side, the report indicates that OPEC (minus Angola) produced less in January from one month earlier. However, these production cuts were offset by higher output from the former Soviet Union.
In fact, the world oil supply has increased by 175,000 barrels per day in January to a new total of 85.5 million barrels per day. Lastly, because of the new shift of Angolan production into OPEC’s numbers, there was large downward revision to non-OPEC production for 2007.

Primarily on the upward revision to demand forecasts we view the latest report as modestly supportive for oil prices. The downward revision to ‘07 non-OPEC supply is also supportive. Though OPEC continues to make strides in cutting production, the main challenge ahead for the producer group is how to quickly integrate Angola which will be brought into OPEC’s quota system in the second quarter of this year.

Also, a recent Cambridge Energy Research report suggests that because of rising rig rates which increased 30 percent each year between 2003 and 2005 and a lack of qualified labor, natural gas prices will be supported. Last year the U.S. saw a record number of wells drilled, but production remained flat. One of the problems for the market in coming years is that as Liquefied Natural Gas projects come online, there may be a shortage of trained engineers to run cooling plants that turn the gas into liquid. This offers little price support to an already tight market.

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