On Wednesday, the International Monetary Fund (IMF) released its latest World Economic Outlook. The report paints a bleak picture for the next 15 months while taking stock of the many variables impacting the world economy right now. Volatile commodity prices, rising inflation, turmoil in U.S. and European housing markets, and broad financial market instability all present serious risks to global economic growth through 2009. In the U.S., the IMF expects economic growth to register at just 0.1% in 2009. That comes on the heels of what is now expected to be a very weak 2008 growth rate of 1.6%.

For energy markets, the impact of ongoing stagnant economic growth is likely to be significant. This week’s chart plots the relationship between U.S. oil demand growth and GDP growth. Since 1970, there have only been three instances of consecutive annual declines in U.S. oil demand: 1974-1975, 1979-1983, and 1990-1991. Based on current IEA forecasts, 2008-2009 will most likely add a fourth. Of course, every other instance has been closely associated with a significant U.S. economic recession, and 2008-2009 will probably hold true to the pattern.

We need look no further than this fundamental “economic growth-oil demand” dynamic to explain the softening of crude oil prices over the past several weeks. As the world’s largest consumer of oil, big changes in U.S. demand can have a big impact on market expectations about tightness. IEA now forecasts U.S. demand to shrink by 750,000 b/d in 2008 and another 400,000 b/d in 2009. That provides a substantial amount of slack to meet rising demand in China and India or to cover supply disruptions in Nigeria (but probably not both). Of course, near-term prices can be influenced by other factors as well. For example, OPEC will likely soon meet to discuss a production cut.

Also of interest:

Bloomberg reports today on newly emerging LNG market dynamics in the face of weaker consumer markets, and U.S. gas prices may now be flirting with the marginal cost of production for critical unconventional projects.

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