OPEC Report Warns of Sharp Oil Inventories Build, Stockpiling

LONDON (Dow Jones Newswires), August 15, 2008

The Organization of Petroleum Exporting Countries Friday warned a global economic slowdown will lead to further weakening of oil demand growth, and highlighted the potential for a sharp build in crude oil inventories.

"With current OPEC production well above the expected demand for OPEC crude, there is potential for a sharp build in crude oil inventories," OPEC said in its monthly report.

The current contango structure of the crude oil futures market, where near-term futures' contracts months are cheaper than delivery dates in the future, indicated current supply is more than sufficient to meet demand and would further encourage stock building.

The group reiterated that demand for OPEC crude oil, which meets about 40% of the world's daily oil consumption, is expected to decrease by around 700,000 barrels a day next year from this year, sinking to its lowest ebb since 2002.

U.S. oil demand has been badly hurt by the slowing economy and high oil prices, with transport and industrial fuels showing the biggest decline in demand, and even strong oil demand growth in China, the Middle East and Asia have done little to offset the huge decline in OECD oil demand in the second quarter, it said.

After crude oil prices fell sharply through mid-July and August, the report highlighted that a weakening of oil market fundamentals has now begun to be reflected in prices.

"Indeed, the market's mild reaction to the recent supply disruptions in the Caucasus is indicative of the recent change in sentiment," the report said.

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