High prices are reducing demand for crude oil

Oil demand growth forecasts cut but no price collapse expected

By Tom Stundza -- Purchasing, 11/14/2007 11:19:00 AM

The International Energy Agency (IEA) lowered its estimate for worldwide oil demand in its monthly report on Tuesday, saying high prices were harming consumption. The IEA says high prices in excess of $90/barrel in recent days are changing energy use in the developing world and in developed countries.

Oil prices, which have more than quadrupled over the last four years, are not far from the inflation-adjusted record of $101.70 a barrel reached in April 1980. “We are certainly seeing a downward revision for 2007 and 2008, and high prices starting to have an effect,'' Lawrence Eagles, chief author of the monthly report tells the Bloomberg News Service. However, futures for light, sweet crude trade on the New York Mercantile Exchange this morning still averaged a high $89/barrel for 2008.

Oil demand in the U.S. will be slower than previously expected next year as near-record fuel prices and a slumping housing market depress consumer spending, the IEA projects. But that doesn’t mean crude oil demand is on the verge of falling: The IEA still forecasts that oil demand to grow by 1.2% this year and another 2.3% next year.

Atop all that, the New York Times says in its report today the question of oil prices remains a particularly sensitive one, especially for the kingdom of Saudi Arabia, the top oil exporter that holds a quarter of the world’s proven oil reserves. “The warning flags on demand are out there and we're not into the winter yet,” commodities analyst Mike Wittner at Societe Generale in London tells Bloomberg. “Even with the revisions the IEA has made, the market still expects stockpile draws into the winter and the first quarter, and that's what the market is keying on” to keep futures prices high.