Falling oil demand puts OPEC in a bind

-- John Kemp is a Reuters columnist. The opinions expressed are his own --

By John Kemp

LONDON (Reuters) - For the last two years, analysts have argued about how far oil demand would respond to the rise in prices.

But in the past few weeks evidence of a sharp decline in demand has become incontrovertible, resulting in big cuts in forecast oil demand, and posing a sharp dilemma for OPEC about how to respond when ministers meet on Nov 18.

The International Energy Agency (IEA) has been steadily dropping its demand forecasts for more than a year, as surging prices have forced conservation measures and substitution for cheaper fuels, while a slowing economy, especially in the United States, bites further into demand.

Back in July 2007, the agency forecast global crude consumption would hit 89.8 million barrels per day (bpd) in Q4 2008. Fifteen months later, the forecast had been cut by a massive -2.2 million bpd (-2.4 percent) to just 87.6 million bpd. Most of the reduction has been concentrated in North America, where the IEA has cut its prediction by -1.6 million b/d (-6.1 percent).

The IEA still believes crude consumption will be higher than in the same period last year (+400,000 bpd) -- but it would be the slowest rate of growth in more than five years, and the forecast increase relies on continued growth in China (+500,000 bpd) and the Middle East (+400,000 bpd) to offset projected declines in North America (-900,000 bpd).

It is not clear how well emerging market demand will hold up if the advanced economies tip into recession.

OPEC therefore faces an awkward choice over how to respond. It is under pressure to allow prices to settle at lower levels as its own contribution to stabilizing financial markets in consumer countries and averting a deep and prolonged worldwide recession.