Recovery more fragile than expected - IEA

SINGAPORE, Nov 1 (Reuters) - Global economic recovery has been more fragile than expected and oil inventories remain very high, Nobuo Tanaka, executive director of the International Energy Agency (IEA) said on Monday.

By Jennifer Tan and Alejandro Barbajosa

He also cautioned about the creation of an asset bubble in commodities following the second round of quantitative easing by the U.S. Federal Reserve.

“The economic recovery has been a bit more fragile than people thought,” he told Reuters in an interview at the Singapore International Energy Week conference.

“There’s still some uncertainty about recovery in Europe, while China is concerned about inflation and they’re tightening policy.”

Tanaka said the oil market was currently very well supplied. “OECD stock levels are very, very high -- historically high, and this situation will continue well into next year.”

The IEA, which advises major industrial nations on energy policy, remains concerned about a rapid rise in oil prices.

“A rapid rise in prices will have a negative impact on economic recovery -- that is our concern,” Tanaka added. “If economic growth is robust and stable, we do not have to worry about the oil price.”

While it was difficult to gauge the potential impact on oil prices of further quantitative easing by the Federal Reserve, the creation of an asset bubble in commodities could not be ruled out, Tanaka said.

“If there is excess liquidity, the money will move into commodities, including oil. We need to watch the fundamentals carefully,” he added.

At a meeting on Nov. 2-3, Fed officials are widely expected to embark on a second round of monetary easing, dubbed QE2, that may consist of U.S. Treasury bond purchases worth a few hundred billion dollars to push more money into the economy. But uncertainty shrouds the scope and pace of the purchases.

The outlook for oil demand next year also remains murky, although China’s growth in oil consumption would be a key driver, Tanaka said.

“I’m quite sure that economic growth will come back at some point, but will it be quick or early enough? The impact on oil demand growth is uncertain,” he added.

“In 2011, oil demand growth will be driven by emerging economies like China, India and the Middle East. OECD demand will decline.”

Over the medium term, tightness in supply could occur sometime in 2015, if economic growth was as robust as expected, Tanaka said. The International Monetary Fund is forecasting growth of around 4.5 percent.

“If that growth materialises, spare capacity at OPEC will decline to 3 million barrels per day from 6 million barrels per day,” he added.

Tanaka said the likelihood of reaching any agreement on climate change this year was quite low.

“It could be very difficult that we reach some global agreement in Cancun,” Tanaka said. “Expectations this time are very low.”

The Conference of the Parties (COP) to the United Nations Framework Convention Climate Change Conference (UNFCCC) meets in Cancun, Mexico from Nov. 29 until Dec. 10.

The COP-16 meeting will be a follow-up to last year’s COP-15 negotiations in Copenhagen, which produced limited results on commitments to reduce carbon dioxide (CO2) emissions.

“We don’t think Copenhagen was a failure, we think it achieved 70 percent of the necessary reduction for 2020 out of our 450 scenario,” Tanaka said.

The IEA’s World Energy Outlook (WEO) in 2009 presented a business-as-usual scenario assuming no policies were undertaken to curb emissions, where global temperatures would rise by 6 degrees Celsius by 2050 form pre-industrial levels.

The agency also presented a second scenario to cap global warming to just 2 Celsius, which implied cutting emissions so that the concentration of CO2 in the atmosphere stabilised at 450 particles per million (ppm).

This year’s WEO, to be published on Nov. 9, will contain a scenario that takes into consideration what was agreed in Copenhagen, which Tanaka says will be somewhere in the middle between the business-as-usual scenario and the 450 scenario.

“2010 is a year when we could have done more, and now we are calculating what is the consequence of this. Probably we will have to pay more,” Tanaka said.



“The business-as-usual scenario is a bit too much, because governments do take actions, so we are trying to create more realistic benchmarks.”