Released: November 9, 2011
Next Release: November 16, 2011

A Silver Lining in the Short-Term Oil Market Outlook?

International oil market conditions tightened dramatically in the last year as supply disruptions in Libya and elsewhere drew down commercial and strategic reserves, but the outlook for oil production appears to be improving, according to the Energy Information Administration's (EIA) November 2011 Short-Term Energy Outlook, which was released yesterday.

EIA expects both Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC crude oil and other liquid supply to grow through 2012. Non-OPEC supply shows relatively robust growth in the fourth quarter of 2011 compared to the third quarter, thanks primarily to a projected 230,000 barrel per day (bbl/d) increase in U.S. crude production over that period. North Sea production is also expected to show a 230,000 bbl/d recovery in the fourth quarter. On the OPEC front, Libyan production is gradually returning to the market. Libyan crude oil exports resumed at the end of September 2011, with initial exports averaging 200,000 bbl/d. EIA expects Libyan crude oil exports to rise to 350,000 bbl/d during the first quarter of 2012, reaching 800,000 bbl/d by the end of 2012.

Combined with a more subdued demand growth outlook than previously forecast due to slower economic growth, the ramp up in global oil production is expected to reduce the "call on OPEC," or the amount of crude needed from OPEC producers or from inventories to meet projected demand, by about 340,000 bbl/d from the third to fourth quarter. That would be a reversal from the trend shown earlier this year, when the market faced unexpected tightness after unrest in Libya curtailed output, shutting in roughly 1.5 million bbl/d of exports. As a result, crude importers had to rely more heavily on stock draws and production from other OPEC suppliers to balance demand.

Thanks to easing market conditions, the EIA now expects the average cost U.S. refiners pay for crude oil to decline, albeit marginally, to an average $100 per barrel in the fourth quarter, compared to $101 per barrel in the third quarter. Oil inventories are also expected to stabilize somewhat after sharply tightening since mid-2010. Commercial crude stocks in Organization for Economic Cooperation and Development (OECD) member countries showed a build of 10.5 million barrels in the third quarter, compared with an average 32 million barrel increase for the same period in the last 5 years. Earlier, OECD stocks had declined by roughly 80 million barrels from end-June 2010 to end-June 2011, the steepest such annual decline since end-June 2002 to end-June 2003, when war in Iraq, a general strike in Venezuela and fighting in Nigeria had conspired to deplete inventories. The latest declines left OECD commercial stocks at the onset of the fourth quarter 2011 at an estimated 21-million-barrel deficit compared to the previous 5-year average.

As rapid as the stock decline might appear, it would likely have been even steeper absent the release of oil from International Energy Agency (IEA) strategic reserves in July and August and a significant ramp-up in Saudi production, which is estimated to have increased from 9.1 million barrels per day in the second quarter 2011 to an average 9.8 million barrels per day in the third quarter. This Week in Petroleum has previously discussed the impact of the IEA release's announcement ("Release of strategic crude oil and product reserves and the short-term outlook," July 13, 2011). July 13, 2011). A budding recovery in non-OPEC output also helped contain inventory draws, as did, at the margin, the fact that global demand grew more slowly than forecast. Estimated third-quarter production from non-OPEC countries averaged 52.3 million bbl/d, about 350,000 bbl/d per day higher than projected in the June STEO, as unexpectedly robust production from the United States and Mexico more than offset lower than expected North Sea and other OPEC non-crude liquids production. On the demand side, bumps on the road to economic recovery trimmed third-quarter global oil consumption by 320,000 bbl/d compared to the June STEO forecast.

The latest STEO takes into account those adjustments to third-quarter projections and carries them forward. For 2011 as a whole, EIA now projects total demand growth of 1.2 million bbl/d, 530,000 bbl/d less than in the June STEO. The EIA also expects U.S. onshore production growth to not only continue, but even accelerate.

Both upside and downside price risks loom large. Upside uncertainty to the crude oil price outlook remains mostly as a result of ongoing unrest in oil-producing regions. The potential for additional and worsening unrest in the Middle East and North Africa is a source of risk to both OPEC and non-OPEC supply. Product inventories in some markets also look on the tight side going into the winter (see This Week in Petroleum, "The Heating Oil Watch," November 2, 2011). On the other hand, downward price pressure exists because of continued lackluster economic growth, especially in advanced economies, as persistent fears about global recession, contagion effects of the debt crisis in the European Union, and other fiscal issues facing national governments raise questions about already weak forecasts in the OECD economies. On the supply side too, there may be downward price pressure if Libya is able to ramp up oil production and exports sooner than anticipated.

Gasoline and diesel prices move down
The U.S. average retail price of regular gasoline fell for the eighth time in nine weeks, shedding almost three cents to reach $3.42 per gallon. The average price is $0.56 per gallon higher than last year at this time. The Midwest had the largest decrease at four and a half cents to put the price at $3.34 per gallon. The Gulf Coast price shed almost four cents while the East Coast and Rocky Mountain prices both fell over two cents to $3.41 per gallon and $3.47 per gallon, respectively. The West Coast tallied the smallest decrease of less than a penny and remained the most expensive region in the country at $3.77 per gallon.

The national average diesel price decreased slightly to remain at $3.89 per gallon. The diesel price is $0.77 per gallon higher than last year at this time. The East Coast and Gulf Coast both lost around a penny to put prices at $3.88 per gallon and $3.80 per gallon, respectively. The Midwest average lost a fraction of penny to settle at $3.86 per gallon. The Rocky Mountain price was up almost two cents at $3.98 per gallon while the West Coast was up just a fraction of a penny and remained the most expensive region in the country at $4.11 per gallon.

Propane stocks edge downward
Last week, U.S. inventories of propane begin to decrease seasonally, as total stocks fell by 0.1 million barrels to end at 60.2 million barrels. Propane stocks in the Midwest region fell by 0.3 million barrels, the largest regional stock draw. The East Coast and Rocky Mountain/West Coast regions each drew 0.1 million barrels. Meanwhile, the Gulf Coast region added 0.4 million barrels of propane stocks. Propylene non-fuel use inventories represented 6.3 percent of total propane inventories.

Residential heating fuel prices rose slightly last week
The average U.S. residential heating oil price increased $0.03 per gallon during the period ending November 7, 2011 to reach $3.88 per gallon. This price is $0.80 per gallon higher than the same time last year. The wholesale heating oil price increased by nearly $0.05 per gallon last week to $3.20 per gallon, $0.75 per gallon more than last year at this time.

The U.S. average residential propane price increased by less than 1 cent to $2.82 per gallon, and the only regional price decrease occurred in the Midwest. This is a rise of $0.32 per gallon compared to the $2.50 per gallon average from the same period last year. The wholesale propane price decreased by less than $0.04 per gallon, dropping from $1.51 per gallon to $1.47 per gallon. This was an increase of $0.14 per gallon when compared to the November 8, 2010 price of $1.34 per gallon.

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