Sustained high oil prices will damage world economic recovery, the International Energy Agency said on Tuesday, as it warned that Opec's cushion of spare oil output to calm the market was at its lowest for four years. Oil demand could fall later this year if costly crude grinds the brake on economic activity, the energy advisor to the industrialised world said in its monthly report.
-- World oil supplies at all-time high of 89m bpd
-- Opec spare capacity falls to lowest since late 2008
"Empirically, past oil price shocks have shown a discernible effect on GDP. Supply shocks tend to be felt just a few months thereafter, while demand shocks usually have an impact roughly a year later," the IEA said. Members of the Organisation of the Petroleum Exporting Countries have informally eased output restraints to accommodate the loss of exports from Libya.
But its spare readily available output capacity fell in February to its lowest since 2008 at around 4 million barrels per day, limiting the cartel's ability to cushion further potential supply disruptions, the IEA said. The Paris-based agency said Opec output fell by 90,000 bpd to 30.05 million bpd in February without Libya.
But output from outside Opec edged world oil supplies to an all-time high that month of 89 million bpd, it said. Continued high oil prices, coupled with potential fiscal tightening measures and inflationary pressures, could derail the fragile global economic recovery, the agency said. It trimmed its forecast for 2011 oil demand growth marginally to 1.44 million bpd from its estimate last month. An oil price above $100 a barrel throughout 2011 would be enough to hurt, the IEA's Executive Director Nobuo Tanaka told Reuters in Oslo.
"If it continues to be $100 through the year, it will certainly be detrimental for the economic recovery all over the world," Tanaka said. "If prices move higher, it will certainly create more problems." Worries about unrest Middle East and North Africa sent Brent crude futures to 2-1/2 year-highs of nearly $120 a barrel in early March. But the impact of the Japan crisis cut Brent by over $5 to around $108 on Tuesday.
Tanaka reiterated that the agency was ready to release strategic oil stockpiles from members if needed in the aftermath of the Japan earthquake and tsunami, in line with its policy of meeting any emergency shortage. But Japan has ample spare oil-fired capacity and high oil stocks to meet its power generation needs, according to the IEA. It said the market impact of lost Libyan crude exports had been softened by the closure of many European refinery customers for routine seasonal plant overhauls. But the fallout from Libya may hit harder as demand picks up once the maintenance period comes to an end after the first quarter.
"Market insouciance may change abruptly as April approaches, when global crude demand is expected to increase by around 1 million bpd as Atlantic Basin refinery maintenance ends", the IEA said. It said the fear of political unrest in major Gulf producers and Saudi Arabia in particular had brought the oil price's political risk premium "back with a bang".
Saudi Arabia accounts for the bulk of Opec effective spare capacity, holding almost 80 percent at 3.2 million bpd, according to IEA estimates. The kingdom increased its oil production in February to 8.62 million bpd from 8.52 million bpd in January, the agency said. Non-Opec supply estimates have been revised up by 150,000 bpd to 53.63 million bpd in February, driven by the re-opening of Alaskan pipeline flows. The IEA said the strong political risk premium in crude futures has attracted speculators, with soaring open interest in the contracts also helping to explain the current prices.