Oil driven by event risk, EIA sees higher consumption

Energy Information Administration (EIA) Short Term Energy Outlook

Based on the outlook from the National Oceanic and Atmospheric Administration for the current Atlantic hurricane season, EIA estimates median outcomes for total shut-in production in the Federal Gulf of Mexico (GOM) during the upcoming hurricane season (June through November) of about 4.5 million barrels of crude oil and 9.5 billion cubic feet (Bcf) of natural gas (see 2012 Outlook for Hurricane-Related Production Outages in the Gulf of Mexico). Actual shut-ins are likely to differ significantly from this estimate depending on the number, track, and strength of hurricanes as the season progresses.

Global oil markets have loosened in recent months, as world oil production outpaced consumption by 0.7 million bbl/d in the first quarter of 2012, and is forecast to exceed it by 1.2 million bbl/d in the second quarter. The oil production gains contributed to a counter-seasonal stock build during the first quarter of 2012, following the significant stock draws during 2011. Industry analysts have attributed some of the recent decline in oil prices to poor economic indicators for Europe, China, and the United States, in addition to reduced market anxiety over current and potential supply disruptions. Although EIA’s economic growth assumptions are unchanged from last month, the crude oil price forecast has been lowered because of upward revisions to current and forecasted supply, primarily from countries outside of the Organization of the Petroleum Exporting Countries (OPEC), and to reflect changes in the relative strength of the upside and downside risks buffeting oil markets.

Despite the recent fall in crude oil prices, EIA expects that the average crude oil price in 2012 will be higher than in 2011. EIA expects the world oil market will tighten moderately in the third quarter of 2012 as world demand reaches its seasonal peak and total consumption exceeds production by about 0.7 million bbl/d. Additionally, spare production capacity levels are projected to be low enough to support a recovery in crude oil prices from current levels.

There are several uncertainties that could push oil prices higher or lower than projected. A number of non-OPEC countries continue to experience large and persistent supply disruptions. Oil prices could be higher than projected in this Outlook if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. Additionally, the effects of the impending European Union embargo and other sanctions targeting exports of Iranian crude oil and their associated payments are still uncertain. Some industry analysts believe that optimism about recent negotiations between Iran and its counterparts in the West has helped to ease prices in recent months, even though the outcome remains uncertain. EIA’s projected oil market balance reflects the impacts from previous sanctions against Iran.

On the demand side, the recent negative economic news on Europe poses a risk to global economic growth. In the current Outlook, consumption in Europe is expected to fall year-over-year by 340 thousand bbl/d in 2012 and by a further 230 thousand bbl/d in 2013. If the economic situation in European Union countries deteriorates, then global economic growth could fall below current expectations and result in reduced oil demand and lower prices. Slower growth in China could also curb demand. EIA currently projects annual increases in consumption in China of about 0.4 million bbl/d in both 2012 and 2013. Recent economic indicators point to some weakness in China’s economic outlook.

World liquid fuels consumption grew by an estimated 0.8 million bbl/d in 2011. EIA expects consumption growth of 0.8 million bbl/d in 2012 and 1.1 million bbl/d in 2013, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth (World Liquid Fuels Consumption Chart). Projected OECD liquid fuels consumption declines by 0.4 million bbl/d in 2012. In 2013, forecast OECD liquid fuels consumption remains essentially flat, with consumption growth in the United States offsetting some of the decline in Europe.

EIA expects non-OPEC crude oil and liquid fuels production to rise by 0.8 million bbl/d in 2012 and by a further 1.2 million bbl/d in 2013. The largest area of non-OPEC growth is North America, where production increases by 890 thousand bbl/d and 470 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and Canadian oil sands. In Brazil, output is projected to rise by 20 thousand bbl/d in 2012 and 120 thousand bbl/d in 2013, with increased output from its offshore, pre-salt oil fields. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field next year, will increase its total production by 160 thousand bbl/d in 2013. Forecast production also rises in China, Russia, and Colombia over the next two years, while production declines in Mexico and the North Sea.

Total consumption fell 340 thousand bbl/d (1.8 percent) last year. Motor gasoline consumption accounted for the bulk of that decline, shrinking by 260 thousand bbl/d (2.9 percent). In 2012, total consumption falls by a more moderate 70 thousand bbl/d (0.4 percent). In the first quarter, total consumption fell 700 thousand bbl/d (3.7 percent) from the same period last year (U.S. Liquid Fuels Consumption Chart) as high prices and record warm weather depressed consumption. For the second half of 2012, EIA expects a year-over-year increase of 230 thousand bbl/d (1.2 percent) in liquid fuels consumption. The bulk of that increase comes from distillate fuel because of projected economic growth and near-normal winter weather.

In 2013, total liquid fuels consumption grows by 120 thousand bbl/d (0.6 percent). Despite assumed growth in U.S. real disposable income of 1.8 percent next year, forecast motor gasoline consumption declines by a further 30 thousand bbl/d (0.4 percent) in 2013. This projection reflects continued slow growth in the driving-age population, an acceleration of the improvement in average fuel economy of new vehicles, and increased rates of retirement of older vehicles. However, consumption of all of the other fuels categories rises, led by a 90-thousand-bbl/d (2.3-percent) increase in distillate fuel consumption.

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