Oil outlook forecasts continued tightening of supplies

The EIA released the latest Short Term Energy Outlook this afternoon. Following are the main highlights of the report focused on oil. As expected this month's forecast is pretty much in line with last month's forecast and as such it has had little impact on price direction at the moment.

Crude Oil and Liquid Fuels Overview. EIA expects a continued tightening of world oil markets over the next two years. World oil consumption grows by an annual average of 1.5 million barrels per day (bbl/d) through 2012 while the growth in supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries averages about 0.3 million bbl/d this year and remains flat in 2012. Consequently, EIA expects the market will rely on both inventories and significant increases in the production of crude oil and non-crude liquids in OPEC member countries to meet world demand growth. While on-shore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained high last year, floating oil storage fell sharply in 2010, and EIA expects that OECD oil inventories will decline over the forecast period to close to the middle of the previous five-year range by the end of 2012.

There are many significant uncertainties that could push oil prices higher or lower than current expectations. Among the uncertainties are decisions by key OPEC member countries regarding their production response to the global recovery in oil demand; the rate of economic recovery, both domestically and globally; fiscal issues facing national and sub-national governments; and China’s efforts to address concerns regarding its growth and inflation rates. In addition, even though Egypt is not a major supplier of crude oil or natural gas to world markets, the recent unrest in that country raises the concern that unrest could spread to other countries in the region with a larger role in supplying world energy markets or that key transit routes for energy and other goods could be disrupted.

Global Crude Oil and Liquid Fuels Consumption. World crude oil and liquid fuels consumption grew by an estimated 2.4 million bbl/d in 2010, to 86.7 million bbl/d, the second largest annual increase in at least 30 years. This growth more than offset the losses of the previous two years and surpassed the 2007 level of 86.3 million bbl/d reached prior to the economic downturn. EIA expects that world liquid fuels consumption will grow by 1.5 million bbl/d in 2011 and by an additional 1.6 million bbl/d in 2012. Non-OECD countries make up almost all of the growth in consumption over the next 2 years, with the largest contributions coming from China, Brazil, and the Middle East. Among the OECD regions, EIA expects that only North America will show oil consumption growth over the next 2 years, which will be offset by continued declines in OECD Europe and Asia.

Non-OPEC Supply. EIA projects non-OPEC crude oil and liquid fuels production will increase by 310,000 bbl/d in 2011, then decline slightly in 2012. Increases in non-OPEC oil production will be concentrated in a few countries, particularly in China and Brazil, where EIA expects each to show annual average production growth of 170,000 bbl/d in 2011. In 2012, EIA expects Canadian production growth to average 170,000 bbl/d while China and Brazil grow by 130,000 and 110,000 bbl/d, respectively. Other non-OPEC production is expected to decline. EIA expects Mexico's production will fall by about 210,000 bbl/d in 2011, followed by a further decline of 80,000 bbl/d in 2012. Similarly, production from the North Sea falls by 220,000 bbl/d and 160,000 bbl/d in 2011 and 2012, respectively. Projected U.S. crude oil production declines by 50,000 bbl/d in 2011 and by a further 190,000 bbl/d in 2012.

OPEC Supply. Forecast OPEC crude oil production increases by 0.4 million bbl/d in 2011, followed by a further increase of 1.2 million bbl/d in 2012. These production increases are in response to the increase in global demand for oil and limited growth in supplies originating in non-OPEC countries. Non-crude liquids production is expected to increase by 0.7 and 0.4 million bbl/d in 2011 and 2012, respectively. EIA expects that OPEC surplus production capacity will remain above 4 million bbl/d during the next 2 years.

OECD Petroleum Inventories. Onshore commercial oil inventories in the OECD countries remained high last year, but reports indicate floating oil storage fell sharply. Now that floating storage has been reduced, EIA expects that OECD onshore inventories will decline over the forecast period. Projected OECD stocks fall by about 55 million barrels in 2011, followed by an additional 60 million barrel decline in 2012. Days-of-supply (total inventories divided by average daily consumption) drops from 57 days to 55 days between December 2010 and the end of 2012, which is close to the middle of the previous five-year range.

U.S. Liquid Fuels Consumption. Total consumption of petroleum and non-petroleum liquid fuels increased by 360,000 bbl/d (1.9 percent) to 19.1 million bbl/d in 2010. The major sources of this consumption growth were distillate fuel oil (diesel fuel and heating oil), which grew by 140,000 bbl/d (3.8 percent), and motor gasoline, which increased by 60,000 bbl/d (0.6 percent). Projected total U.S. liquid fuels consumption increases by 140,000 bbl/d (0.8 percent) in 2011 and a further 170,000 bbl/d (0.9 percent), to 19.5 million bbl/d, in 2012. Motor gasoline and distillate fuel account for much of the growth in consumption.

Late yesterday afternoon the API released their latest inventory assessment. The API released a mixed inventory report. The API reported a surprise decline in crude oil stocks, a greater than expected build in gasoline stocks and a draw in distillate fuel inventories that came in below the expectations. The API reported a crude oil inventory draw of about 600,000 barrels even as refinery utilization rates increased by only 0.1% to 83.3% of capacity. The API also reported a decline in crude oil imports and a modest decline in PADD 2 stocks. They also showed a strong build in gasoline stocks of about 3.2 million barrels while distillate fuel stocks declined by about 500,000 barrels as the weather last week in the main heating oil consuming part of the US was modestly cold. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish as prices have increased in overnight trading. In fact if today’s EIA report is in sync with the API report I would view it as modestly negative as both gasoline and distillate fuel stocks underperformed versus expectations and the crude oil decline …although a positive was still minor compared to the large overhang of crude oil that still exists in the US.

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