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UPDATE 3-Oil prices to ease on slow economy, higher output

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* IEA cuts demand growth outlook due to sluggish economy

* Pressure on OPEC to produce more easing

* Iraq, North America to increase oil production steeply

(Adds trader comment) By Dmitry Zhdannikov and Christopher Johnson

LONDON, Oct 12 (Reuters) - The world could see a gradualeasing of oil prices over the next five years due to sluggisheconomic growth and rising energy efficiency and as productionincreases steeply in Iraq and North America, the West's energywatchdog said on Friday.

The International Energy Agency, which advisesindustrialised nations on energy policy, cut its global oildemand growth projection for 2011-2016 by 500,000 barrels perday (bpd) compared to its previous report in December 2011.

As a result, the pressure on OPEC to produce more oil willease dramatically and the cartel will have to cut production tono more than 31 million bpd until 2017 to balance global demand.It has been producing between 31 and 32 million bpd this year.

"Expectations of economic growth through the forecast periodhave been reduced amid persistent OECD debt concerns, especiallyin the euro zone. Even China, the main engine of demand growthin the last decade, is showing signs of slowing down," the IEAsaid in its Medium-Term Oil Market Report. "Readings suggest agradual easing of prices over the forecast period."

London Brent crude prices fell after the IEA report, tradingdown more than a dollar a barrel, below $115 at 0930 GMT.

"Crude oil prices reversed from yesterday's gains amidconcerns over global oil demand growth," said Myrto Sokou, asenior research analyst at Sucden Financial. "The bearish IEAfigures set the tone for the day so we can expect furtherdeclines for today's session."

In its previous report in December 2011, the IEA said itexpected global oil demand to rise by around 8 percent between2010 and 2016 but said it saw markets becoming less tight thanin previous years.

Ten months later, it paints an even more comfortablepicture, saying oil demand will rise by less than 7 percentbetween this year and 2017, when it will reach 95.7 million bpd.

"The demand outlook looks more subdued, while thetransformative power of non�conventional oil productiontechnologies applied in shale and tight formations in NorthAmerica exceeds earlier expectations," it said.

Last year, the IEA said U.S. production of light tight oilfrom shale formations was "a game-changer in the making". Thisyear it says the impact of the new oil streams is increasing.

Global production capacity is expected to increase by 9.3million bpd by 2017 to 102 million bpd, effectively exceedingdemand by over 6 percent.

"Around 20 percent of liquids growth comes from Iraqicapacity and 40 percent from North American oil sands or lighttight oil production," the IEA said.

OPEC will also spend heavily on boosting its spare capacity,which is projected to more than double to 5-7 million bpd, alevel unseen since before the 2003�2008 oil price rally.

OPEC's spare capacity is seen as the main cushion againstsupply disruptions and worries about dwindling capacity havebeen one of the main reasons behind recent oil price spikes.

IRANIAN OUTPUT PLUMMETS

Despite the IEA's benign outlook, the agency said there wasexceptional uncertainty about the global economy and heightenedregional geopolitical risks.

"Last year's string of supply disruptions, in Syria, Yemen,Sudan, the North Sea, Brazil and the Gulf of Mexico, illustratedthe possibility of a 'perfect storm' of coincidental disruptionsin many oil provinces," it said.

"Even those realised disruptions, however, pale incomparison with the new threat of unrest and political turmoilspreading further at the heart of the Middle East producingregion," it added.

Oil prices approached $130 per barrel earlier this year, notfar from their 2008 peaks of $147 per barrel, due to worriesover supply disruptions from Iran.

The United States and EU imposed tough new financialsanctions on Iran this year over its nuclear programme, hurtingIran's access to some export markets. Israel and the UnitedStates have also said they reserve the right to use force ifnecessary to prevent Iran from obtaining a nuclear weapon. Iransays its nuclear programme is peaceful.

"The situation remains highly unpredictable and thesustainability of the sanctions over the longer term isevidently untested," the IEA said.

Last year, the IEA said tighter sanctions on exports of oilequipment to Iran could result in production capacity decliningby almost a quarter to under 3 million bpd by 2016.

Ten months later, Iran is already producing less than 3million bpd as Western sanctions stifle exports. The IEA said ina separate monthly oil report on Friday that it estimatedIranian oil production had declined by 220,000 bpd in Septemberto a new multi-decade low of 2.63 million bpd.

"Whereas many expected the sanctions to lose some bite inSeptember, as Iranian exporters and some of their clients werereportedly seeking ways to get around insurance constraints, infact compliance appears to have tightened," the IEA said.

It estimated Iranian September oil exports fell to 860,000bpd versus around 2.2 million bpd in 2011. The slump in exportshas led to a steep fall in revenues and clashes on the streetsof Tehran as the local currency collapsed.

(Editing by Peter Graff)

((Dmitri.Zhdannikov@thomsonreuters.com))

Keywords: IEA OIL/