(EnergyAsia, December 28 2011, Wednesday) — The International Energy Agency (IEA) expects global oil demand to increase by 700,000 b/d to 89 million b/d this year, and by another 1.3 million b/d in 2012 to reach 90.3 million b/d.

Its latest projections represent a downward revision of 200,000 b/d over the previous forecast issued last month for both years.

The Paris-based agency attributed the reduced expectations to the weak state of the world economy, in particular for Europe’s, which will slow down oil demand growth.

For the medium term, the IEA has forecast global oil demand to grow by an average 1.1 million b/d a year to reach 95 million b/d in 2016 from 88.3 million b/d in 2010.

It said strong demand for diesel in particular will continue to underpin the world oil markets in coming years, with significant increments in the transportation, industrial and, increasingly, the power generation sectors.

The agency expects the supply outlook to brighten with total liquids capacity rising by nearly 1.3 million b/d a year from 2010 to reach 101.5 million b/d in 2016, thanks largely to expansions in Iraq, Libya, Latin America and development of shale oil in the US.

While noting that OPEC’s spare capacity remains tight in 2011 and 2012, the IEA said it will ease up and return to a range between 5% and 6% of global demand thereafter.

Barring major outages, the IEA predicts supply will match or exceed demand growth trends by slightly over one million b/d a year.

“A lower GDP scenario, with economic growth 30% weaker than in the base, generates more modest annual demand growth of 700,000 b/d which, assuming continued upstream capacity growth, leaves the world with six to eight million b/d of spare capacity during 2013‐2016,” it said.

Over the 2010-2016 period, the IEA sees global crude refining distillation capacity to rise by 8.7 million b/d, down from its previous estimate of 9.6 million b/d. This is due largely to expectations for weaker fuel demand, but will still exceed total fuel demand growth of two million b/d.

The IEA added:

“The intense tightening in market fundamentals evident during 2009‐2011 could ease over the next five years, the more so if 2012 economic growth takes a sharper downturn than our base case suggests. That doesn’t detract, however, from the imperative to sustain investment for the future.

“The magnitude of supply side challenges has been amply demonstrated in 2011. The loss of 1.6 million b/d of Libyan supply for more than half the year (which to date has cost the market nearly 400 million barrels) has been exacerbated by the worst level of unplanned non‐OPEC stoppages since 2005.

“Anticipated non‐OPEC supply growth for 2011 has been wiped out as a result. Global oil demand has been running ahead of supply since economic recovery began in 2009, but has been doing so in a more pronounced fashion since mid‐2010.

“Any sign of the mechanical outages which have bedevilled OECD supply in 2011 persisting could lead to further downgrades to our 2012 outlook. A deteriorating geopolitical and supply‐side backdrop hangs over Syria, Yemen and Sudan, even if ultimately supply disruptions there might prove short‐lived.

“The spectre of an embargo on Iranian oil exports has also emerged, and although precise market reaction is difficult to predict, added tensions on the supply side are likely to have a bullish impact, notably on inter‐regional and sweet‐sour price spreads.”