IEA Raises Oil Demand Forecast

Another shot in the arm for crude oil, helping sustain the impressive ongoing rally that has more than doubled its price from the Feb’09 lows. While yesterday we heard from a U.S. government agency that the massive inventory overhang is steadily coming down, today’s report paints a relatively positive — or less negative — picture of the demand side.

What all these favorable reports do is to help crude oil shrug off some of the negative news flow on the economic front and maintain its up-trending bias.

Earlier today, the International Energy Agency (IEA), the Paris-based agency associated with the OECD, raised its 2009 demand forecast modestly to reflect some early signs of global economic health. Just to be clear, the IEA is still looking for negative demand growth this year, but its forecast is less negative now than it was in its last monthly report.

The agency is still forecasting a worldwide demand drop of 2.5 million barrels per day, or roughly 2.9% from the 2008 level, to 83.3 million barrels per day. This is a modest 120,000 barrels higher than the agency’s last monthly demand forecast. Growth in production of plastics and other petrochemicals in Asia and increased Chinese imports drove the positive revision.

The IEA forecast is in line with the latest outlook from the Energy Information Administration (EIA), an agency of the U.S. government. As shown in the nearby chart from the EIA, the agency is looking for a roughly 1.9 million barrels drop in worldwide demand this year and positive demand growth next year.

While we have confidence in the economic underpinning of the current rally, a souring of the global economic outlook remains a key risk factor. Also, given the weak near-term supply-demand fundamentals, coupled with ample excess production capacity within OPEC, there is limited room for a price spike at this stage.

The major international integrated oil companies, such Chevron (CVX), and global oilfield service players, such as Schlumberger (SLB) and Weatherford (WFT) are well placed to capitalize on this outlook.

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