Analysis: Europe oil demand at 1995 lows as prices bite

LONDON Wed May 25, 2011 9:03am EDT

LONDON (Reuters) - European oil consumption this year will fall to its lowest since 1995 as high prices cut sharply into fuel use in debt-laden peripheral eurozone nations.

Efficiency gains have reduced European oil demand over the past five years. Crude price changes do not normally have as much impact on retail demand as in the United States because tax in Europe makes up a much larger share of total fuel costs.

Now, with crude priced at $110-$120 a barrel, high prices are accelerating the decline.

"Europe is showing strong signs of demand destruction as the EU battles with rising debt problems among its member states which also feel the wrath of high fuel prices," said David Wech from Vienna-based JBC Energy consultancy.

"As we went into higher prices it was always a risk that we would see demand erosion and destruction, and the numbers coming out are confirming this risk," said Olivier Jakob at Petromatrix.

Energy consultants Wood Mackenzie say total European demand could fall by 200,000-250,000 barrels per day this year from around 15.1 million bpd in 2010.

Last time demand was seen at levels below 15 million was in 1995, versus a peak of 2006 at 16.42 million.

"We are going back to 1995 levels this year and probably next year as well and then we expect it to start to grow again recovering a little bit as long as economic recovery continues and as long as prices don't go too high," said Wood Mackenzie analyst Francis Osborne.

Oil prices spiked as unrest in the Middle East and North Africa shut in around 1.5 million barrels per day of Libyan crude supplies and concerns emerged about how much spare capacity OPEC has left to cushion any new supply shortage.

European refineries, which have far greater capacity than demand, kept over a fifth of their capacity shut in April for a second month running, data from industry monitor Euroilstocks showed.

Across the Atlantic, U.S. gasoline demand fell in April for the first time in three months as high pump prices and expensive grocery bills took their toll on drivers.

Refineries in 16 European countries worked at 78.61 percent of capacity in April compared with 77.47 percent of capacity in March, and 80.63 percent a year earlier. <O/EUROIL2>

DEMAND EROSION LINKED TO MACROECONOMIC HEALTH

Most analysts attribute the low level of European crude runs to poor refining margins due to high crude prices.

But as retail business tries to bring products prices at least partly in line with crude, it is also starting having a toll on demand amid austerity measures in many EU countries.

Analysts expect to see the worse demand erosion in countries with mature and fragile economies. Data from south European countries already confirms the trend.

Italy in April showed an acceleration in the drop of refined products use as consumption fell 1.6 percent versus a fall of 1.2 percent in January-April.

Diesel demand for road vehicles inched up 0.5 percent but failed to offset a 6 percent fall in gasoline.

"Very low demand for gasoline is basically showing the impact of oil prices," said Christophe Barret from Credit Agricole.

The West's energy watchdog, the International Energy Agency, said this month that products demand in the 23 biggest European economies contracted by 4.1 in March year-on-year with gasoline use falling by over 6 percent.

It urged OPEC to pump more oil added that it would consider releasing its own emergency stockpiles. The World Bank, the IMF and the Asian Development Bank have also all expressed concerns that high oil prices could undermine economic recovery.

"We expect to see in coming weeks more evidence in the statistics of oil demand destruction and this should maintain a strong cap on (oil price) rallies," Petromatrix consultant Olivier Jakob said.

(Additional reporting by Dmitry Zhdannikov; editing by Dmitry Zhdannikov and Richard Mably)

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