The world oil market needs a bigger oil stock "buffer" to cope with geopolitical tension, even though inventory levels are already above five-year averages, the International Energy Agency said March 11.

OPEC's decision in early March to leave current crude production limits unchanged for the time being should "just about" allow stocks to rebuild after a winter draw, but did not help soothe frenzied markets, the IEA said in its latest monthly oil market report.

"Latest data suggest OPEC's rollover should just about redress this winter's stock draws, but the market is concerned that producers are more inclined to react to price declines than price rises," the IEA said.

"[OPEC's decision] was unable to calm markets that reflect the need for a higher stock buffer due to increased geopolitical tensions and a rebuild of crude stocks ahead of peak summer demand."

Industry-held oil stocks in OECD countries rose by 32.6 million barrels in January to end the month at 2.617 billion barrels, well above the 2003-2007 average for the same time of year of 2.57 billion barrels, the IEA said.

January's stock build left inventories across the OECD regions "almost uniformly in excess of seasonal norms," it added. OECD stocks at the end of the month were equivalent to 52.9 days of forward demand, above the five-year average of 51.8 days.

Preliminary data for February show a further combined stock build of 23 million barrels from the US and Japan.

The IEA said the overall comfortable level of stocks masked some specific areas of low cover such as distillates in Europe and gasoline in OECD Pacific countries.

Speaking on the sidelines of a refining conference in Paris, the IEA's chief economist, Fatih Birol, said the agency felt an increase in supply would reassure the market and ease current record prices. "One of the key messages we are trying to give is that more investment, more oil will definitely help the market become more comfortable...and bring the oil prices down," Birol said.

In its report, the Paris-based IEA said it now expected world oil demand to average 87.54 million b/d in 2008, 80,000 b/d less than it previously had predicted. The downward revision stemmed from weakness in oil demand in the OECD, where the IEA cut its demand estimate for this year by 190,000 b/d to 49.27 million b/d.

The revised outlook follows mild weather in January and a "carry-through" of weaker demand growth from the fourth quarter of last year, as well as the impact of weaker economic growth, the IEA said.

On the supply side, the IEA trimmed its estimate of non-OPEC supply for this year by 100,000 b/d to put it at 50.6 million b/d, up 900,000 b/d from last year's average production.

The IEA's estimate of the "call" on OPEC crude and stocks for 2008 was left unchanged at 31.8 million b/d. This is below the cartel's current production, which the IEA estimated at 32.12 million b/d in February, down from 32.24 million b/d in January. The IEA said output fell last month from several OPEC countries, including Saudi Arabia, Iran. Nigeria and Angola, with the declines partially offset by a rise in Iraqi production.

Excluding Iraq, the 12 members bound by output agreements produced 29.75 million b/d in February, down from 30.02 million b/d in January but still above their collective 29.673 million b/d target.

Total world oil production rose to 87.47 million b/d in February, up from 87.29 million b/d in January, the IEA said, thanks to higher volumes from the Americas and the former Soviet Union.

The agency estimated OPEC's effective spare crude production capacity at 2.2 million b/d, with Saudi Arabia and the UAE accounting for 2 million b/d of this total.

"Recent pipeline outages and border tensions affecting Ecuador and Colombia, weather-related disruptions in the North Sea and Australia, and the ongoing susceptibility of Nigerian and Iraqi facilities to insurgent attacks illustrate market vulnerability and suggest that a more comfortable supply cushion is desirable," the IEA said.

The IEA figures do not include any spare capacity for Indonesia, Iraq, Nigeria or Venezuela, which it said were "deemed likely to struggle to increase production in the short term."

Bottlenecks in oil services are contributing to the lack of spare capacity, as is reticence from producers about increasing capacity in the face of uncertain future demand growth.

Some OPEC countries are fighting to maintain existing capacity levels either for security reasons or because their oil fields are getting old.

On top of this, high prices are encouraging producers to strike a harder bargain with investors over contract terms, the IEA said, a trend which it said was "undermining marginal investments."

All these factors are leading to an "investment logjam" which may only be broken with greater clarity and consensus between producers on future demand.

OPEC countries with mature oil producing regions also may need more flexibility in what they can offer international oil companies.

"Sustaining, let alone increasing, capacity in future may require more innovative investment models...contract flexibility needs to be a two-way street," the IEA said.

Created: April 3, 2008