Oil drops below $75; IEA cuts forecast

International agency warns against Gulf oil spill over-reaction; says ‘knee-jerk reaction’ could have ‘unintended consequences’

Petroleum News

Oil prices fell below US$75 a barrel on May 12 as the dollar strengthened further against the euro and traders mulled signs of tepid U.S. crude demand against growing consumption in developing economies.

By early afternoon in Europe, benchmark crude for June delivery was down 74 cents to US$74.91 a barrel in electronic trading on the New York Mercantile Exchange. The June contract lost 72 cents to settle at US$75.65.

Lower prices were seen to be caused in part by the dollar’s strengthening, which makes oil priced in dollars more expensive for investors holding other currencies.

On May 13, the International Energy Agency, or IEA, lowered its 2010 global oil demand forecast by 190,000 barrels per day to 86.4 million bpd, saying the adjustment stems largely from changes to nonhistorical baseline data, including slightly higher gross domestic product, or GDP, prognoses, offset by a higher oil price assumption.

EIA raised its forecast for oil by about $2 from last month’s estimate. It now expects prices to average about $84 a barrel in the second half of the year, rising to $87 by the end of 2011.

EIA also forecast moderate growth in energy use over the next 25 years as Americans use more renewable energy and rely less on imported oil.

IEA also cautioned public officials against a “knee-jerk reaction” in response to BP’s April 20 well blowout and resulting oil spill in the Gulf of Mexico.

“A knee-jerk reaction by regulators, banning new offshore licensing altogether, as some are proposing, risks pushing companies to ever-more precarious locations in search of hydrocarbons,” IEA said, per a Dow Jones Newswire report. “The law of unintended consequences may apply.”

The Organization of Petroleum Exporting Countries monthly report on oil demand released May 11 predicted an increase in global demand this year. OPEC, which produces about 40 percent of the world’s oil, thinks demand will rise 1.1 percent this year to 85.38 million barrels a day. That’s 950,000 barrels a day above the 2009 level.

It should be noted that IEA is awaiting key data from Russia and China on their oil use in previous years, which analysts think could change its 2010 forecast.

Concerning the Gulf of Mexico oil spill, public officials still don’t know whether the three oil leaks will be sealed relatively soon.

—The Associated Press contributed to this report