The International Energy Agency’s (IEA) Oil Market Report for September shows resumed demand growth with the onset of the winter heating season, although the agency has trimmed its projection of demand in 2005 down to 83.9 million barrels per day. As shown in the chart below left (Click to enlarge), global demand rose by 204,000 barrels per day to 82.4 mb/d. Global supply rose by 640,000 barrels to 84.0 mb/d. The chart below right plots the cushion: the margin between supply and demand for the last 11 months.

According to the IEA, non-OPEC production dropped for a third consecutive month, by 100 kb/d. Hurricane Ivan shut-in 475 kb/d of US Gulf Coast output, with similar reductions expected to persist in October. The IEA projects that recovering US and North Sea production should help non-OPEC supply rise by 1.4 mb/d from September to December.

OPEC supply rose 710 kb/d in September to 29.9 mb/d, boosted by a 540 kb/d increase in Iraqi production. The Saudis maintained supply at close to 9.5 mb/d, flat with their August production.

The IEA based their trimming of demand growth in 2005 based on expectations os slower economic growth, and on the negative feedback loop that high oil prices have on demand and the economy.

Sustained high oil prices will help cool oil demand growth in two ways; first indirectly, as the higher energy costs resulting from the combination of high prices and the low price elasticity of advanced economies reduce consumption and undermine economic growth, and in the longer run more directly, by encouraging energy savings and oil-demand restraint.

Although the agency keeps insisting that supply is keeping pace with demand, the markets—focused more on the thin cushion between supply and demand, the difficulty in expanding supply and all the geopolitical risk factors that could curtail some of that supply—are ignoring that advice. The price for WTI crude crested $54 today.

In last month’s OMR (earlier post), the IEA made it explicit that the Saudis—widely regarded as the swing producer—would have to be able to increase their production to 10.5 mb/d. Although there is a great deal of noise about that, it hasn’t actually happened yet. As we’ve often discussed here, there is growing scepticism over the Saudi ability actually to do that. Speculation and projection aside, what is clear in the immediate term is that the Saudi oil—with its higher sulfur content (“sour”) is not as useful in slaking global thirst as the sweeter, low-sulfur crudes.