Exclusive: Oil demand outlook dims as economies sputter

LONDON Thu Aug 4, 2011 4:29pm EDT

An oil rig is seen lit up on the outskirts of Havana April 5, 2011. REUTERS/Desmond Boylan

An oil rig is seen lit up on the outskirts of Havana April 5, 2011.

Credit: Reuters/Desmond Boylan

LONDON (Reuters) - A sharp slowdown in economic growth, particularly in the United States, is hitting oil consumers and companies, forcing analysts to slash estimates for global oil demand.

In a report to be published in the next few days, Barclays Capital has cut its estimates of world oil demand growth for this year and 2012 to reflect the dramatic economic slowdown.

The investment bank, which had been one of the most bullish forecasters of oil prices this year, now sees global oil demand increasing by 1.1 million barrels per day (bpd) this year to 88.68 million bpd.

Barclays Capital previously forecast a rise in oil demand this year of 1.56 million bpd and two months ago expected the increase to be as much as 1.7 million. The sharp reduction would take it from one of the most bullish on growth to one of the most bearish, according to a Reuters poll two months ago.

"Given the general state of the macro-economy, the state of oil demand does not seem particularly healthy," Barclays Capital oil analyst Amrita Sen said.

"Moreover, U.S. GDP is 2 percent lower than what everyone expected (or) knew of due to the revisions issued last week and our economists have reduced a cumulative 1.8 percent of U.S. growth over this year and next. Hence the revision."

Barclays Capital's projections for oil demand growth this year are now below estimates from the world's top oil market forecasters, the International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC) and the U.S. Energy Information Administration (EIA).

Oil analysts expect other investment banks to follow suit and cut their estimates after a stream of shockingly weak U.S. economic data in recent days -- from GDP to manufacturing to personal spending.

Crude oil prices crashed nearly 6 percent on Thursday in the second-biggest one-day slide of the past two years. The grim economic outlook has hit other financial assets as well, with Wall Street tumbling nearly 5 percent. The S&P 500 stock index was down 10 percent over the past 10 days, its steepest 10-day loss since March 2009.

Brent crude oil has fallen some $20 from its 2-1/2-year high in April. At around $108 a barrel it is still trading about where it was at the end of February, when U.S. consumer confidence was at a three-year high and global growth was seen to be picking up speed.

The rapid deterioration in economic sentiment is causing many oil analysts to recast their view of the rest of this year. Instead of resilient demand growth draining inventories, oil demand destruction is rapidly becoming the dominant theme.

"There are some bullish wild cards lurking in the background, but none of them seem very likely to materialize in a way which would trump the weak demand picture," wrote Eurasia group analysts led by Greg Priddy in a note.

Olivier Jacob at oil consultants Petromatrix said lower economic growth and consumption were likely to lead eventually to lower oil prices.

"Even Barclays, a perma-bull, is forced into revising down its forecast for oil demand growth for 2011," Jakob said. "High oil prices do have an impact on the global economy."

Barclays Capital has also cut its forecast for oil demand growth next year, expecting an increase of 1.34 million bpd in 2012, compared with its previous forecast of 1.4 million bpd.

MORE REVISIONS

Washington has cut sharply its estimates of growth this year and now says the U.S. economy stumbled badly in the first half, coming dangerously close to contracting at one point.

The Commerce Department said last week that the U.S. economy expanded by just 0.4 percent in the first quarter, a sharp downward revision from the previously reported 1.9 percent gain, and grew at only a 1.3 percent annual pace in the second quarter as consumer spending barely rose.

U.S. consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply in the second quarter, advancing at only a 0.1 percent rate. In June, U.S. consumer spending dropped for the first time in nearly two years.

The impact is evident in oil data as well. U.S. gasoline stocks rose over the past month instead of shrinking as they generally do during the peak summer driving period. Average gasoline demand in the last four weeks was down 3.6 percent from year-ago levels, the U.S. government data showed.

Barclays Capital said it now expects real U.S. gross domestic product (GDP) to increase by an average of 1.7 percent in 2011 and global economic growth to average 3.8 percent.

The IEA and EIA last month cut their oil demand growth forecasts for 2011, to 1.2 million bpd and 1.43 million bpd respectively. Analysts expect further revisions this month.

Christophe Barret, global oil analyst at Credit Agricole, has already cut his estimate of global oil demand growth to 1.0 million bpd from 1.25 million bpd and says high oil prices are eating into fuel consumption across the world.

"Our estimates may still be too optimistic," Barret said.

(Additional reporting by Claire Milhench and Jonathan Leff in New York; editing by Jason Neely and David Gregorio)