Oil prices had fallen in the week ended August 10, to a three month low, in line with almost all commodities, on mounting concern that slower economic growth in the US would translate into lower global demand for raw materials.

On August 12, US crude rose more than $1 to $116.05 a barrel. London Brent crude was 32 cents up at $112.99. The International Energy Agency in its monthly report released recently left its oil demand growth outlook virtually unchanged for this year, while raising its 2009 forecasts slightly. But it cut its estimate for 2008 demand for oil from Opec and predicted supplies would grow.

Oil demand is slowing sharply in advanced economies as people ease up on driving, supplies are rising and the market is set to cool well into next year, the IEA said. But it is too soon to declare the price boom over for now, the IEA warned, pointing to unexpected risks such as conflict in Georgia which threatened “a key energy transit hub” carrying a million barrels of oil per day.

The agency noted in its monthly report that the price of oil had dropped by $30 a barrel from high points in mid July to the beginning of August.

The IEA said that for some months the signs had “pointed to a potential easing in (market) fundamentals for the second half of 2008 and into 2009, before renewed tightening thereafter.” But the IEA said it would “hesitate” before saying that the “tipping point” for the market had been reached.

Various disruptions in July and August “have thrown up a number of warning signs, the IEA said. An improvement in fundamentals was overshadowed by events such as major outages affecting Nigeria and Azeri supplies in the last two weeks.

The recent closure of the BTC pipeline, carrying a million barrels per day through southern Georgia, because of an attack claimed by Turkish insurgents, and then the fighting, had not “materially affected prices,” the IEA reported.

US demand for oil was likely to fall by 3.1 per cent this year to 20 million barrel day and by 2.0 per cent in 2009 to 19.6 million barrel day.

In Europe, demand in the 12 months to June fell by 2.3 per cent. Data suggested that demand in OECD countries in Europe would fall to an average of 15.2 million barrel day this year, a decline of 0.4 per cent from the level last year, and also next year for a fall of 0.3 per cent.

The agency held its forecast for global demand this year steady at 86.9 million barrel day, an increase of 800,000 barrels per day or 0.9 per cent from the level last year.

It increased slightly its forecast for demand next year by 70,000 barrels per day to 87.8 million barrel day, an increase of 900,000 million barrel day or 1.1 per cent from this year’s level. The growth would come from outside the OECD area, the IEA forecast.

Meanwhile, Iraq said recently that it was resuming exploration of its immense oil reserves, after a break of nearly 20 years owing to UN sanctions. Iraq said it wanted to ramp up output by 500,000 barrels per day from the current average production of 2.5 million bpd, about equal to the amount being pumped before the US-led invasion of March 2003.

Exports of 2.11 million bpd currently form the bulk of the war-torn nation’s revenues, and the oil ministry is keen to raise capacity over the next five years to 4.5 million bpd.

The International Energy Agency said recently that Opec last month, pushed its oil production to the highest level in its 48 year history. It was led by Saudi Arabia, which had pledged to reduce record prices by increasing Saudi production from 9.4 million barrels a day to 9.7 million b/d, the highest level in 30 years. The Saudi increase, coupled with higher volumes from Iran, helped push the 13 member group’s total output to 32.8 million barrels a day and the oil price fell to $114 a barrel.

Opec’s production increase was not the only reason oil prices fell; demand curtailed by economic slowdown and high oil prices had also played a critical role, the IEA said.

The IEA cut its global oil demand growth to 790,000 barrels a day, down from July’s estimate of 890,000 b/d. Some of the demand in rich countries will be lost for ever, it noted, saying. “Even if retail prices ease, it seems unlikely that motorists who have purchased smaller cars will revert to gas-guzzling vehicles.”

But demand growth in emerging countries remained strong, with Chinese consumption rising above 8 million b/d for the first time in June, hitting 8.3 million b/d.

The market is split about the direction of crude oil prices, but the previous general bullish sentiment is cracking.

Oil prices rebounded on August 13, after US weekly inventories data showed unexpectedly large declines in crude oil and product stocks. US crude stocks fell 400,000 barrels, above the consensus forecast for a drop of 200,000 barrels, after tropical storm Edouard disrupted imports, which dropped 538,000 barrels a day to 9.66 million b/d.

Activity by refiners was also disrupted by the storm, with refinery utilization down 1.1 percentage points to 85.9 per cent.

The main boost to oil prices came from a massive drop of 6.4 million barrels in gasoline stocks, much greater than the consensus forecast of a 2.1 million barrel decline.

However, the stock drop was offset by ongoing weakness in US petrol demand, averaging 9.44 million barrels a day during the past four weeks, down 1.9 per cent compared with the same period last year.

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