09-01-08 The outlook for oil supply and demand fundamentals over the next two years points to an easing of the oil market balance in 2009, according to the EIA.
Higher non-OPEC production and planned additions to OPEC capacity should more than offset expected moderate world oil demand growth, and relieve some of the tightness in the market, the EIA said, adding that "as a result, surplus production capacity could grow from its current level of under 2 mm bpd to over 4 mm bpd by the end of 2009. This balance suggests some price softening, although delays or downward revisions in capacity additions in both OPEC and non-OPEC nations could alter the outlook, as could OPEC production decisions."

Consumption
According to EIA forecasts, world oil consumption is expected to rise by 1.6 mm bpd in both 2008 and 2009 compared with the estimated 1 mm bpd increase recorded last year. The larger volume gains expected in 2008 and 2009 compared with 2007 mainly reflect higher consumption expected in the Organization for Economic Cooperation and Development (OECD), particularly Europe, where weather factors constrained oil consumption last year.
Projections of continued strong world economic growth will spur oil consumption gains in a number of non-OECD markets, including China, non-OECD Asia, and the Middle East countries, over the next 2 years.

Non-OPEC supply
Non-OPEC production is expected to rise by about 0.9 mm bpd in 2008 and by 1.6 mm bpd in 2009, the EIA said. This compares with a gain of 0.6 mm bpd recorded last year.
Azerbaijan, Russia, Canada, Brazil, the United States, China, Sudan, and Kazakhstan account for a large share of the gain in non-OPEC production growth in 2008 and 2009. Increases in these nations will more than offset expected declines in production in a number of countries including Mexico, the United Kingdom, and Norway, the EIA said.

As in recent years, the pace and timing of non-OPEC supply growth will continue to be subject to delays in key projects due to a number of factors, including labour and equipment shortages, as well as uncertainty over the rates of decline in existing production. Projected growth of production capacity is very sensitive to the progress of several large-scale projects, including the already-delayed Sakhalin-II project in Russia, the Marlim field in Brazil, and the ACG project in Azerbaijan.
Recent history has shown that non-OPEC capacity growth projections often fall short of expectations. Non-OPEC supply growth will also benefit from higher non-crude supplies such as biofuels, condensates, and natural gas liquids.

OPEC supply
According to the EIA, OPEC members’ production decisions and the pace and timing of capacity additions in a number of countries will play a key role in determining oil market trends over the next 2 years. EIA projects that OPEC crude oil production will average about 32.6 mm bpd in 2008 and 31.8 mm bpd in 2009 compared with the 31.7 mm bpd seen during the fourth quarter of 2007.
Increasedproduction from Angola, Saudi Arabia, Kuwait, and Iraq boosted OPEC’s crude output during the fourth quarter 2007. OPEC will hold meetings in Vienna on February 1 and on March 5 to assess production plans.

EIA is projecting that OPEC crude oil capacity could increase by 1.4 mm bpd in 2008 and by another 1.0 mm bpd in 2009. Much of the increase reflects higher capacity in Saudi Arabia. Although the Khursaniyah project in Saudi Arabia has been delayed, other projects expected to be completed are Nuayyim and Shaybah in 2008 and Khurais in 2009.
Algeria, Angola, Nigeria, Qatar, and the United Arab Emirates are also expected to raise crude capacity over the forecast period. In addition, substantial gains in natural gas liquids capacity are expected in a number of OPEC nations. The EIA petroleum balance indicates that OPEC surplus production capacity, held mostly in Saudi Arabia, will rise from 1.6 mm bpd now to 2.1 mm bpd by the end of 2008 and perhaps to the 4-to-5 mm bpd range by the end of 2009, depending on potential project delays.

Inventories
Total OECD commercial inventories are expected to continue to fall. Based on partial data, EIA is estimating total OECD commercial inventories at year-end 2007 were about 2.54 bn barrels, which is 19 mm barrels below the previous 5-year average. This compares with the end of 2006, when inventories were about 100 mm barrels above the 5-year average.
The oil balance assumes OPEC members’ production decisions maintain OECD commercial inventories near the 5-year average levels over the next 2 years.

US petroleum consumption
Petroleum consumption averaged an estimated 20.7 mm bpd in 2007, up 0.2 % from 2006. Under the EIA scenario, motor gasoline consumption growth is expected to average 0.8 % in 2008 and 1.0 % in 2009 as the driving-age population grows and the ethanol share of the gasoline pool increases.
Airlines are expected to resume fleet expansions, resulting in jet fuel consumption recovering from a 0.3-% decline in 2007to show growth of about 1.2 % per year over the next 2 years. Based on current weather projections and a slowdown in the economy in 2008, distillate consumption growth is projected to slow from 1.9 % in 2007 to 1.2 % in 2008 and 1.6 % in 2009.

Production
In 2007, domestic crude oil output is estimated to have averaged 5.1 mm bpd, unchanged from 2006. In 2008, growth in crude oil production in the Federal Gulf of Mexico, where the Atlantis deepwater platform began production in late 2007, is projected to offset declines in onshore production in Alaska and the Lower-48 states.
Total domestic crude oil production in 2009 is projected to grow by 6.9 %, or about 350,000 bpd, with the start-up of the Thunder Horse and Tahiti platforms in the Gulf of Mexico and a small boost in onshore production because of the continued high crude oil prices, the EIA said.

The EIA noted that the Energy and Security Independence Act of 2007 mandates that transportation fuels sold in the United States must contain at least 9.0 bn gallons of renewable fuels in 2008 and 11.1 bn gallons in 2009. The 2008 renewable fuels mandate is projected to be exceeded, with domestic ethanol production increasing from a projected total of 6.5 bn gallons in 2007 to about 8.5 bn gallons in 2008.
Ethanol imports and biodiesel should add about 0.5 and 1.2 bn gallons, respectively, to the 2008 renewable fuel volumes. Although domestic ethanol production capacity is expected to increase from the current level of 7.4 bn gallons per year to about 13 bn gallons per year in 2009, ethanol transportation and distribution infrastructure constraints and State gasoline product quality regulations, which inhibit ethanol blending, are expected to slow market penetration and thus restrain production growth.

Prices
WTI crude oil prices averaged $ 66.02 per barrel in 2006 and $ 72.30 per barrel in 2007. WTI prices are projected to average about $ 87 and $ 82 per barrel, respectively, in 2008 and 2009. Regular grade gasoline prices, which averaged $ 2.81 per gallon in 2007, are projected to average $ 3.14 and $ 3.03 per gallon, respectively, in 2008 and 2009.
Heating oil prices are projected to average $ 3.19 and $ 3.01 per gallon, respectively, in 2008 and 2009, while diesel fuel prices are projected to average $ 3.29 and $ 3.15 per gallon in those years.

Inventories
As of December 31, total motor gasoline inventories were an estimated 208.2 mm barrels, down 3.6 mm barrels from the end of 2006 and 2.6 mm barrels below the previous 5-year average at that time of year. Motor gasoline stocks entering April are projected by the EIA to be 208.6 mm barrels, 7.4 mm barrels above last year and close to 4 mm barrels above the previous 5-year average at that time of year.
Distillate stocks were an estimated 127.4 mm barrels at on December 31, down 16.2 mm barrels from the previous year and 7.9 mm barrels below the previous 5-year average at that time. At the end of the heating season (March 31), distillate stocks areprojected to be 104.1 mm barrels, 15.6 mm barrels below last March and 5.6 mm barrels below the previous 5-year average at that time.

Natural gas consumption
Total natural gas consumption is estimated to have increased by 6 % in 2007, driven largely by increases in the residential, commercial, and electric power sectors that occurred earlier in the year, the EIA said.
The forecast of near-normal weather in 2008 and 2009 is projected to lower the annual increase in total consumption to 0.6 and 1 %, respectively, for those two years.

Production and imports
Total US marketed natural gas production is estimated to have increased by 2.5 % in 2007, with increases in onshore lower-48 production offsetting declines in the offshore Gulf of Mexico. The EIA said that in 2008, total marketed production is expected to increase by 1.6 % primarily because of the start-up of new deepwater Gulf of Mexico supply infrastructure, which is expected to increase Gulf production by 7.9 % for the year.
In addition, lower-48 onshore production in 2008 is expected to rise by 0.5 %. In 2009, the anticipated 2.8 % decline in production from the Gulf due to steep decline rates in the offshore fields is expected to be offset by production growth of 0.8 % in the lower-48 onshore region, resulting in net growth in total marketed production of 0.2 %.

According to the EIA, imports of liquefied natural gas (LNG) are estimated to have reached about 781 bn cf in 2007, a 34-% increase over 2006. The import volume in 2007 varied significantly throughout the year; the highest daily receipts of over 3 bn cf occurred in the spring and the lowest daily receipts of less than 1 bn cf occurred in recent months.
The latest decline in LNG imports to the United States has been caused by the combination of increased demand and higher natural gas prices in other markets around the world, including Asia and Europe. Annual import volumes are projected to reach about 937 bn cf and 1,179 bn cf in 2008 and 2009, respectively.

Inventories
On December 28, 2007, working natural gas in storage was 2,921 bn cf.
Current inventories are now 222 bn cf above the 5-year average (2002-2006) and 160 bn cf below the level during the corresponding week last year.

Prices
The Henry Hub spot price averaged $ 7.32 per mm cf in December. The Henry Hub monthly average spot price is expected to average slightly over $ 8 per mm cf in both January and February.
On an annual basis, the Henry Hub spot price is projected to average $ 7.78 per mm cf in 2008 and $ 7.92 per mm cf in 2009.

Electricity consumption
With temperatures this summer expected to be milder than last summer, although close to normal, growth in residential electricity sales should slow from 3.0 % in 2007 to 0.7 % in 2008, according to the EIA. Lower summer temperatures along with projected slower economic growth in 2008 will also limit electricity sales growth in the commercial and industrial sectors.
Total electricity consumption is expected to grow by only 0.5 % in 2008, but return to a more normal growth rate of 1.8 % in 2009.

Prices
Following relatively modest increases in power generation fuel costs, US residential electricity prices are expected to grow by 2 % in 2008 to an average of 10.8 cents per kWh.

Coal consumption
Electric-power-sector coal consumption, which accounts for more than 90 % of total US coal consumption, is estimated to have grown by 2.1 % in 2007. Slow growth in electricity consumption, combined with projected increases in natural-gas-fired and hydroelectric generation, will lead to a slight decline, 0.2 %, in electric-power-sector coal consumption in 2008.
Electric-power-sector coal consumption is projected to increase by 1.3 % in 2009.

Production
US coal production is estimated to have fallen by 0.8 % in 2007. Projected weak demand for coal in 2008 will result in an additional 0.8- % decline in coal production, but production is expected to recover in 2009.
In the Western region, the Nation’s largest producing region, coal production is expected to fall by 0.3 % in 2008 and remain relatively flat in 2009.

Inventories
Total coal stocks are estimated to have grown by 3.1 % in 2007 to 192.7 mm short tons.
Total coal stocks are expected to fall by 1.7 % in 2008 and by 3.6 % in 2009, with reductions in primary inventories accounting for the change in both years, according to the EIA.