IEA today released its Oil Market Report. The following text appears in this report.

GDP assumptions for 2011 and 2012 are scaled back nearer to 4% annual growth, with the bulk of the downgrade focused on the OECD countries.

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. Not everyone is paying $110/bbl of course, and refiners with ready pipeline access to heavily discounted crude in the US Midwest are enjoying bumper margins, unlike their brethren in Europe and elsewhere. WTI aside however, benchmark Brent crude since early May has see-sawed in a range of between $105 and $120/bbl. True, the IEA Libya Collective Action in late-June, and the broader equity and commodity sell-off seen in early-August caused prices to plunge by around $10/bbl each time. But prices have stubbornly reclaimed lost ground again within weeks, raising anew questions about the key drivers of prices.

There are certainly growing concerns about the health of the global economy. Government debt in the OECD and the spectre of inflationary pressures and currency protectionism in emerging markets raise fears that expectations of ‘business-as-usual’ 4.5-5% world GDP growth are unsustainable. Our own GDP assumptions for 2011 and 2012 are this month scaled-back nearer to 4% annual growth, with the bulk of the downgrade focused on the OECD countries. Oil demand growth is trimmed as a result, now averaging 1.0 mb/d this year and 1.4 mb/d next. Repeating the still-lower GDP sensitivity of June’s Medium-Term Oil and Gas Markets 2011, which cuts a further one-third off GDP growth looking forward, oil demand growth slips to a much weaker 0.7 mb/d and 0.4 mb/d in 2011 and 2012 respectively. This latter case is not our ‘most likely’ prognosis, but the financial and economic headwinds are nonetheless gathering momentum.