SHORT-TERM ENERGY OUTLOOK

Crude oil prices are likely to be sensitive to any incremental supply tightness

Mar 07 - 13, 2005

At their January 30 meeting, the Organization of Petroleum Exporting Countries (OPEC) decided to maintain its agreed-upon production levels through the first quarter of 2005. However, high levels of OPEC production in recent months have contributed to inventory builds in the Organization for Economic Cooperation and Development (OECD) countries. US oil inventories and inventories in the other industrialized countries, which had been relatively low during early 2004 compared to historical standards, rose above the middle of the observed 5-year historical range. Given this stock build, OPEC said it would reconsider market conditions and production levels when it meets again on March 16. Non-OPEC supply growth is expected to average 1.2 million barrels per day over 2005-2006.

World petroleum demand growth is likely to be the key factor for oil markets in 2005. World petroleum demand growth for the 2004-2006 period is projected to average about 2.4 percent per year (approximately 2 million barrels per day), a level that exceeds expected growth in non-OPEC supply and global refinery capacity. Although this is strong growth, it is down from the 3.4 percent demand growth (2.6 million barrels per day each year) in 2004. Lower global oil demand growth is attributed to several factors, including the impact of high world oil prices and slower projected Chinese oil demand growth.

US petroleum demand in 2004 averaged an estimated 20.5 million barrels per day, up 2.4 percent from the previous year and the largest percentage increase in 5 years. Although all the major categories contributed to that increase, distillate demand grew fastest at 3.6 percent, buoyed by substantial increases in industrial activity and heating oil deliveries, while motor gasoline demand increased by 1.4 percent. For the 2004-2006 total petroleum demand is projected to increase by an average 1.7 percent per year. Growth in both highway travel and motor gasoline demand is projected to average 2 percent per year during the same period. Moderation in industrial output growth and lack of growth in heating oil deliveries, however, are expected to slow average distillate growth to about 1.6 percent per year between 2004 and 2006.

On February 7, 2005, the US monthly average pump price for regular gasoline was $1.91 per gallon, down slightly from the previous week but up about 13 cents per gallon from one month ago. Recently, gasoline prices have been rising in response to late fall and early winter rising crude oil prices, high rates of refinery utilization, and some decline in surplus gasoline inventories in recent weeks. Despite relatively high absolute levels for gasoline inventories, days cover (beginning inventories divided by demand per day) for gasoline has generally been declining (on a year-over-year basis) for over 2 years, suggesting a general environment of increasing short-term tightness for gasoline markets. Days cover was down about 5 percent from year-ago levels in the fourth quarter of 2004 and by about 3 percent in January 2005. Pump prices for regular gasoline are expected to average about $1.98 per gallon during the first half of 2005, up 20 cents from the first half of 2004. Continued growth in gasoline demand in the US, both seasonally and year-over-year, is expected to increase average monthly prices to over $2.00 per gallon by spring.

NATURAL GAS

The average Henry Hub natural gas spot price was $6.78 per thousand cubic feet (mcf) in December and $6.32 per mcf in January. The unusually mild winter weather in the Northeast this past December reduced heating demand, which, in turn, lowered spot prices for natural gas in January. Working gas in storage is estimated to have totaled 2,021 billion cubic feet at the end of January, which is 15 percent higher than one year ago and 17 percent higher than the 5-year average. With the heating season now about two-thirds over and with ample storage, natural gas prices are likely to ease over the next several months. Still, with crude oil prices expected to remain over $40 per barrel through 2006, and with a relatively tight natural gas supply/demand situation over the same period, Henry Hub prices are expected to average roughly $5.45-$5.75 per thousand cubic feet annually for the 2005 to 2006 period.

In response to continued economic growth, natural gas demand is projected to increase by 3.0 percent in 2005. Domestic natural gas production in 2005 is projected to increase by 1.6 percent from 2004 levels, partly due to high gas-directed drilling rates and partly due to continued recovery in the Gulf of Mexico from the effects of Hurricane Ivan. Steady increases in liquefied natural gas imports, restrained export growth, and carryover from the robust storage levels noted above are expected to contribute to moderate improvement in the supply picture in 2005.

Courtesy: Energy Information Administration