Oil slides $8 in correction; Goldman says sell

Yesterday the EIA released their latest Short Term Energy Outlook Report. Overall the report was supportive for oil prices and mostly in sync with the IEA report released earlier in the day. Following are the main highlights of the report covering oil.

Crude Oil and Liquid Fuels Overview. EIA expects continued tightening of world oil markets over the next two years, particularly in light of the recent events in North Africa and the Middle East, the world's largest oil producing region. The current situation in Libya increases oil market uncertainty because, according to various reports, much of the country's 1.8-million bbl/d total liquids production has been shut in and it is unclear how long this situation will continue. The market remains concerned that the unrest in the region could continue to spread.

The forecast for total world oil consumption grows by an annual average of 1.6 million bbl/d through 2012. Supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries grows about 0.2 million bbl/d this year, then falls slightly in 2012. Consequently, EIA expects that 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 projected world demand growth. Onshore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained high in 2010, but floating oil storage fell sharply. EIA expects that OECD oil inventories will decline to the lower bound of the previous 5-year range by the end of 2012.

There are many reasons for market uncertainty that could push oil prices higher or lower than current expectations. Among the uncertainties are: the continued unrest in producing countries and its potential impact on supply; decisions by key OPEC member countries regarding their production response to the global recovery in oil demand and recent supply losses; 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.

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 reductions in demand during the prior two years and surpassed the 2007 consumption level of 86.3 million bbl/d. EIA expects that world liquid fuels consumption will grow by 1.5 million bbl/d in 2011 and by an additional 1.7 million bbl/d in 2012. Non-OECD countries will make up almost all of the growth in consumption over the next 2 years, with the largest demand increases coming from China, Brazil, and the Middle East. EIA expects that, among the OECD regions, only North America will show growth in oil consumption over the next two years, offsetting declines in OECD Europe and Asia.

OECD Petroleum Inventories. Onshore commercial oil inventories in the OECD countries remained high in 2010, but reports indicate that floating oil storage fell sharply. EIA expects that OECD onshore inventories will decline over the forecast period. Projected OECD stocks fall by about 111 million barrels in 2011, followed by an additional 38 million barrel decline in 2012. Days of supply (total inventories divided by average daily consumption) drops from a relatively high 57 days at the end of 2010 to 55 days by the end of 2011, which is close to the middle of the previous 5-year range.

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