A paradox has emerged as oil prices remain high amid declining demand forecasts.
Opec and the International Energy Agency cut their forecasts for crude demand again this week, erasing as much as 400,000 barrels per day (bpd) from previous estimates.
Yet Brent crude, the European benchmark, seems immune to the predictions, trading comfortably above US$112 yesterday.
"Market observers are puzzling over the 'paradox' of weakening economic growth and oil demand indicators on the one hand, and $110/bbl crude on the other," wrote the IEA, an energy watchdog based in Paris, in a report released yesterday. "Prices have stubbornly reclaimed lost ground again within weeks, raising anew questions about the key drivers of prices."
The IEA's explanation is that despite the drops in demand, consumption continues to outpace supply.
Demand last year was 1.4 million bpd higher than supply, the agency reported, and in the first half of this year it was 500,000 bpd higher.
"The focus has now switched more to supply, amid slowing demand growth in [the first half of 2011], with both the Libyan disruption and temporary, but widespread, non-Opec outages leading to a continued market tightening," wrote the IEA.
The conflict in Libya and the loss of its 1.6 million bpd of sweet crude from world markets have kept oil prices for much of the year in the $100 to $120 range.
While Libyan output accounts for only 1.5 per cent of world supply, its crude is hard to replace among European refiners.
In July, amid fears that the sustained high prices could jeopardise the global economic recovery, the IEA coordinated the release of 60 million barrels of oil from the reserves of the US and its member nations.
Yet the move put a cap on prices only temporarily.