Overview.
Prospects for improved oil market fundamentals over the next 18 months point to an easing in the market balance and price weakness over the near term. The combination of slower U.S. and global oil consumption growth, increased production capacity for crude oil and natural gas liquids in the Organization of the Petroleum Exporting Countries (OPEC) beginning in the third quarter 2008 and continuing through 2009, and higher non-OPEC supply, raises the prospect for a drop in demand for OPEC crude oil and an increase in surplus capacity. Downward price pressures would increase if the economic slowdown proves deeper or longer than expected, and if higher prices lead to lower consumption and lower demand for OPEC crude than currently anticipated. There is also a risk that any weakness in oil prices could be minimal or short-lived, especially if consumption growth exceeds current expectations or if oil production capacity expansion plans in either OPEC or non-OPEC nations turn out to be lower than expected. Supply risks in Iraq, Nigeria, and Iran, as well as threats of hurricanes over the near term, continue to influence market expectations. In addition, OPEC production behavior that would lead to voluntary production cuts aimed at keeping inventories fairly tight would also limit downward price pressure.
Consumption.
Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels. The decline in U.S. consumption in the first half of 2008, reflecting slower economic growth and the impact of high prices, was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 bbl/d. Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels. The projection for 2009 consumption is about 460,000 bbl/d lower than last month's assessment, reflecting lower expectations for consumption in the United States and other OECD countries. Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India (World Oil Consumption). Further consumption declines in the OECD nations, coupled with the move to reduce subsidies in large parts of the developing world, should limit future world consumption growth.
Non-OPEC Supply.
EIA is revising this month's outlook for non-OPEC supply growth in 2008 compared with last month's, largely because of project delays in Asia, lower output growth now expected in the Former Soviet Union, lower growth in Canada caused by the upward revision of 2007 data, and reduced production in Azerbaijan due to the closure of the BTC pipeline. If new projects come online as now anticipated, total non-OPEC supply is projected to rise by about 510,000 bbl/d in the second half of 2008 and by 850,000 bbl/d in 2009 compared with year-earlier levels. This compares with a 330,000 bbl/d decline in non-OPEC supply recorded during the first half of 2008. Non-OPEC supply growth through 2009 is expected to be led by Brazil, the United States, and Azerbaijan (Non-OPEC Oil Production Growth). Given recent history, possible additional delays in key projects as well as accelerating production declines in some older fields cannot be ruled out. For example, Russian oil output was down by almost 1 percent in the first half of the year, raising the chances for the first annual decline in output since 1998. As a result, net non-OPEC production gains could be less than the current forecast, leading to both higher demand for OPEC oil and higher prices than currently projected.
OPEC Supply.
OPEC crude oil production is expected to rise to 32.9 million bbl/d during the third quarter of 2008, up from 32.3 million bbl/d in the second quarter. The forecast assumes that Saudi Arabia will maintain its July 9.7 million bbl/d production level through the third quarter, representing a 400,000 bbl/d rise from second quarter levels. OPEC crude oil production is projected to drop to about 32.4 million bbl/d in the fourth quarter of 2008, and to decline to 31.6 million bbl/d in 2009. Lower crude production combined with planned increases in OPEC total liquids production capacity suggests OPEC surplus crude production capacity could increase from 1.2 million bbl/d currently to about 3.6 million bbl/d by the end of next year (OPEC Surplus Oil Production Capacity). Although an increase in the supply cushion could ease upward price pressure, it does not appear large enough to trigger a sharp price decline. Moreover, possible delays in adding supply capacity, proactive OPEC decisions to cut output, or expectations that supply growth in the post-2009 period will have a difficult time keeping pace with demand, could minimize and shorten any market weakness.
Inventories.
OECD commercial inventories during the second quarter of 2008 increased by only 490,000 bbl/d, well below the average build of 910,000 bbl/d during this time of the year. At the end of the second quarter, estimated commercial inventories stood at 2.58 billion barrels, 17 million barrels below the 5-year average and equal to about 53 days of forward consumption (Days of Supply of OECD Commercial Stocks). OECD commercial inventories are projected to rise by 340,000 bbl/d in the third quarter compared with the average seasonal build of 450,000 bbl/d, which would leave OECD commercial inventories about 30 million barrels below the 5-year average at the end of the third quarter. - EIA
