US oil, gas demand recovers; production mixed

July 1, 2002
Worldwide demand for petroleum products will increase this year as economic recovery takes hold, though strong prices will limit demand growth.

Special Report: Midyear Forecast

Worldwide demand for petroleum products will increase this year as economic recovery takes hold, though strong prices will limit demand growth.

In the US, demand for motor gasoline will escalate, but consumption of other oil products will wane. Total US liquids production will increase. Output of crude and condensate will inch up, and natural gas liquids production will recover from a year ago, but US marketed production of natural gas will decline this year. Gas imports will be nearly unchanged.

Refining margins will be suppressed under the weight of high crude costs, low product prices, and plentiful inventories. Refining capacity utilization will be little changed from last year. Imports of crude and products will dip, as will exports. End-of-year stock levels will be below those of 2001.

International market

Tightening in the international oil market is inevitable this year. Demand is increasing, and though there is ongoing cheating on quotas, the Organization of Petroleum Exporting Countries and other exporters have reined in output so as to stabilize prices in the wake of the past 6 months' drop in demand.

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Demand for petroleum products in Organization for Economic Cooperation and Development countries is expected to pick up substantially in the third quarter, averaging 47.9 million b/d compared with second quarter demand of 46.6 million b/d. European demand is expected to account for 700,000 b/d of the increase, while North American demand is slated to record a 500,000 b/d jump from the second quarter to the third.

The International Energy Agency has predicted a small increase in demand for Pacific OECD countries during the third quarter but has forecast a jump of 800,000 b/d in the fourth from the third.

IEA figures show that total OECD demand will average 47.8 million b/d for the year, up from 47.7 million b/d last year. Meanwhile, the Paris-based agency pegs non-OECD demand at 28.7 million b/d, a 400,000 b/d increase from last year. No major changes among the regions are expected.

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Supply of crude among the OECD countries as a whole will be unchanged from a year ago at 21.9 million b/d. The only differences will be that while North American output increases by 100,000 b/d, OECD Pacific supply will fall by the same amount.

Non-OECD output, however, will jump 900,000 b/d from last year, and the increase will occur primarily in Russia. IEA estimates that for 2002, Russia will have increased its average output of crude 1 million b/d over its 2000 production level.

OPEC

Since the start of 2001-when output and consumption were high-until the second quarter of this year, OPEC decreased exports of crude to keep supply in check as demand dwindled. Additionally, Norway, Angola, Mexico, and Oman joined the organization in its efforts during the first half of 2002 by pledging their own output cuts.

OPEC has demonstrated considerable restraint in adhering to its self-imposed price band, which calls for output adjustments so that the OPEC basket price of oil fluctuates only within the range of $22-28/bbl. This restraint has occurred in spite of excess capacity, as well as growing capacity, in some OPEC countries.

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As a result of exporters' improved manner of managing the market, quarterly stock changes have been muted. A mere 100,000 b/d of oil was added to inventories during first quarter 2002. This was followed by a zero stock change in the second quarter.

During the second half of this year, OPEC will have to raise the amount of oil it exports in order to keep prices from surging in the face of stronger demand.

OGJ expects that a quota increase will combine with cheating on export agreements to push third quarter OPEC output at 26 million b/d, up from 24.7 million in the preceding quarter. This will allow for a stockbuild of just 200,000 b/d. Fourth quarter output will increase further by 1 million b/d, resulting in another small injection of crude into inventory.

Crude oil prices

Driven by heightened tensions in the Middle East, crude oil prices rose substantially in the first half of 2002. The average world export price of crude oil increased to $24.83/bbl in May from $17.73/bbl in December. The average world export price surged to $21.64/bbl for March from $18.75/bbl for February then jumped to $24.45/bbl for April.

For the first 6 months of last year, the world export price of oil averaged $24.98/bbl as various forces combined to pressure prices including concern over US gasoline supplies and shipments from crude exporters as they exercised production restraint. During the second half of 2001, world export prices moderated, and for the year the average price was $23.15/bbl.

The price of crude on the New York Mercantile Exchange (NYMEX) has increased recently as well. The near-month futures price of light, sweet crude oil increased to average $21.40/ bbl in the first quarter of this year from an average $20.55/bbl in the fourth quarter of 2001 when supplies were more than adequate. For the first quarter of last year, NYMEX crude averaged $28.80/bbl in light of tighter supplies.

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The NYMEX crude price continued to climb in the second quarter, averaging $24.76/bbl in April and $26.92/bbl in May.

The US wellhead price of oil hit its recent low in December, averaging $15.54/bbl, then rose to average $15.89/bbl in January and $17/bbl in February. For 2001, the US wellhead crude price averaged $21.91/bbl. OGJ forecasts that this year the wellhead price will average $22/bbl.

Product prices

The OGJ weekly survey of US self-serve unleaded motor gasoline pump prices shows a sharp decline from a year ago. First quarter 2002 pump prices averaged $1.17/gal vs. a first quarter 2001 average of $1.46/gal.

Excluding all federal, state, and local taxes, the pump price fell to an average $0.76/gal for the first quarter from $1.05/gal a year earlier. The prices reflect the continuing climb gasoline taxes, last year averaging 40.8¢/gal. This is up from 40.3¢/gal a year earlier and 40.1¢/gal in 1999.

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The average April pump price climbed to $1.35/gal from $1.24/gal in March, as oil prices were also increasing. The average pump price for May was $1.39/gal. OGJ projects that the average US unleaded gasoline pump price will average $1.30 this year, barring any major unforeseen supply disruptions.

OGJ expects residential heating oil prices to average $1.00/gal this year, down from $1.25/gal last year and $1.31/gal a year earlier.

A mild winter drove the first quarter 2002 price of residential heating oil to $1.11/gal as compared with a first quarter 2001 price of $1.34/gal. The most recent data available from the US Energy Information Administration show that a cool March pushed heating oil to average $1.14/gal, up from $1.09/gal in February and $1.10/gal in January.

Natural gas prices

Natural gas prices have moderated considerably from a year ago as storage levels have swelled. Spot gas prices for the first half of this year averaged $2.74/MMbtu, down from $5.78/MMbtu for the same period last year.

Despite the surge in natural gas inventories, NYMEX natural gas prices have increased in recent months in anticipation of rising demand in the second half of the year as industrial demand in particular rebounds. In addition, gas drilling rates are weak compared with a year ago.

The average NYMEX near-month price for gas climbed to $3.56/MMbtu in May from $3.11/MMbtu in April, $2.93/MMbtu in March, and $2.21/MMbtu in February.

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OGJ forecasts that the average US natural gas wellhead price for 2002 will be $3/MMcf. This compares to a 2001 average of $4.12/MMcf.

The average US wellhead gas price peaked last year at $8.06/MMbtu in January, then dropped to average $5.84/MMbtu in February before starting a steady descent throughout the year, ultimately averaging $2.38/MMbtu in December.

This year the wellhead gas price dipped to average $2.14/MMbtu in February, then increased to average $2.52/MMbtu in March and an estimated $2.96/MMbtu in April, the most recent data available at press time.

US economy

OGJ expects US gross domestic product (GDP) to grow 3.2% this year. Bolstered by an upswing in private inventory investment, first quarter GDP grew at an annual rate of 5.6%.

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Other major contributors to the increase in real GDP in the first quarter were personal consumption expenditures, government spending, residential fixed investment, and exports. A decrease in nonresidential structures partly offset the contributions of these components. Imports, which are a subtraction in the calculation of GDP, increased sharply.

GDP contracted during only 1 quarter last year, which technically speaking would not signal that the economy entered a recession. In the third quarter, GDP declined at an annual rate of 1.3% following a second quarter increase of just 0.3% and a first quarter gain of 1.3%. During the fourth quarter, GDP rose 1.7%.

The US Federal Reserve reported that industrial production rose 0.4 percent in April for its fourth consecutive monthly increase. Manufacturing output increased in April 0.3% to its highest level since August 2001; excluding motor vehicles and parts, manufacturing output was up 0.1%.

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Output at utilities and production in mining also increased during April, and the rate of capacity utilization for total industry improved to 75.5% but remained more than 6 percentage points below its 1967-2001 average.

The unemployment rate rose to 6% in April from 5.7% in March, the Bureau of Labor Statistics of the US Department of Labor reported. This lagging economic indicator typically rises as the economy recovers. Employment rose in the services industry but fell in construction, while job losses in manufacturing continued to moderate.

US energy demand

Although signs of economic recovery will provide a boost to energy consumption this year, robust prices are holding US energy demand in check, boosting efficiency. OGJ forecasts that total 2002 US energy consumption will increase to 98.2 quadrillion btu (quads).

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Last year, when US energy demand totaled 96.9 quads, was the first since 1991 that annual consumption contracted.

Energy efficiency, the amount of energy consumed per dollar of GDP, will continue to improve. This ratio has improved every year since 1970, as GDP growth has outpaced energy consumption growth. OGJ expects the efficiency ratio to decline to 10.2 quads/$1 this year from last year's 10.4 quads/$1 and 2000's ratio of 10.7 quads/$1.

Energy sources

US demand for energy will increase among all major sources this year.

Oil and gas will continue to be the dominant players this year, holding a combined 62.1% share of the energy market. This is nearly unchanged from a year ago, although gas will slightly gain in market share while oil slacks a bit. The highest share these two sources held occurred in 1972, when their demand totaled 77.7% of the market.

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US energy demand for coal, nuclear, hydroelectric, and other sources will increase this year, though the shares of the energy market they hold will be little changed.

Oil energy demand will be 38.4 quads, an increase of 0.4%. Oil consumption decreased last year for the first time since 1995, as the slowdown in the economy affected personal incomes as well as industrial demand. Prices were strong in the first 3 quarters of the year. The events of Sept. 11 dampened demand as well. This year's economic recovery will boost demand for oil products, although there will be less fuel switching from gas to oil.

OGJ expects that with a 2.7% jump, gas will experience the biggest increase in US energy demand this year. With a total of 22.6 quads consumed, gas will comprise 23% of the energy market. This compares with a 22.7% share last year.

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Last year's tight supplies and high prices, especially during the first quarter, constrained demand for gas. While commercial customers increased their consumption of gas, residential and industrial consumers, as well as electric utilities, used less natural gas than during 2000.

Coal's share of the US energy market will be 23.1% as consumption increases 1.2% from last year's level. In 2001, the residential, commercial, and industrial sectors consumed more coal than during the previous year, but the electric power sector used slightly less. Stocks of coal surged 22% last year as production and imports increased while consumption and exports declined.

Nuclear power plant operations will be nearly the same as last year. With 104 nuclear units operating, 89.7% of capacity was utilized last year, up from 88.1% the year before. The capacity factor was 85.3% in 1999, 78.2% in 1998, and 71.1% in 1997.

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Nuclear energy's share of total electricity net generation, as reported by US Energy Information Administration, was 20.3% last year, the highest ever, up from a 2000 share of 19.8%.

As far as its share of the total US energy market, nuclear will account for 8.4% of all energy consumed, the same as last year.

All remaining energy demand is met by renewable sources. These include hydroelectric; wood, waste, and alcohol; solar and wind; and geothermal.

Total consumption of renewable energy sources declined last year due to drier-than-normal weather in the Northwest. Normal precipitation this year should boost hydroelectric power consumption and raise demand for renewable energy sources to 6.3 quads, a gain of 4.2%. This would raise the category's share of the total energy market to 6.4% from 6.2%.

Natural gas market

OGJ forecasts that US natural gas demand will increase 2.7% this year. Consumption will total 22.05 Tcf.

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The amount of gas in storage has been the market's focus since the fourth quarter of 2001. During that quarter, a mere 57 bcf withdrawal of gas from storage followed a 1,049 bcf addition to storage in the third quarter. Moving into 2002, warm weather continued to propel large net additions of gas into storage.

While weak demand was mostly to blame for such high storage levels, also contributing was a small increase in production. EIA estimates that US gas production increased 2% last year, despite a strong run-up in the number of gas-directed drilling rigs being utilized. For the week ended July 13, 2001, the Baker Hughes Inc. count of active rotary rigs drilling for gas surged to 1,068, up from 716 for the corresponding week a year earlier.

Although gas inventories have been more than plentiful, gas prices have been sustained by a slew of factors, one of them being a decline in 2002 production. Additionally, gas prices are linked to oil prices, and as such, continuing tensions in the Middle East play a part in driving the price of gas.

Also buoying the price of gas has been the impending economic recovery, which will especially spur demand for gas by the industrial sector. This sector accounts for about 40% of all gas delivered to consumers. Last year, industrial consumption of gas declined 5.6%-the same amount by which the sector increased its gas demand a year earlier.

US marketed production of gas will decline 1.9% this year, OGJ forecasts, while gas imports will be nearly unchanged.

The number of gas-directed drilling rigs in the US has rebounded somewhat since recording a recent low of 591 for the week ended Apr. 5. The bottom of the drilling cycle has passed, but adequate supplies of gas in underground storage heading into the next withdrawal season will hold prices and drilling activity at a moderate level through the remainder of 2002.

Imports of gas from Canada and Mexico are expected to be roughly the same as last year, but LNG imports are forecast to increase. In 2001, the US received 238 bcf of LNG from Algeria, Australia, Nigeria, Oman, Qatar, and Trinidad and Tobago. This year, LNG imports will increase to 245 bcf.

OGJ expects there to be a 200 bcf net addition to gas storage this year. Exports are forecast to increase to 370 bcf from 364 bcf last year.

US petroleum demand

Demand for petroleum products in the US will be 19.68 million b/d this year, up from 19.6 million b/d. Motor gasoline demand will remain strong, but demand for jet fuel, distillate, and residual fuel oil will decline. LPG and ethane consumption will increase with the recovery of the general economy. Exports of products and crude will be down from a year ago.

US consumption and exports of crude and products will total 20.65 million b/d vs. 20.58 million b/d last year. Following 9 consecutive years of rising petroleum product consumption, total demand declined last year amid high prices and a sluggish economy.

Motor gasoline

Moderate prices are helping to boost gasoline demand. For the year, US gasoline consumption is forecast to increase 2.5% to 8.8 million b/d.

For the first quarter, gasoline demand averaged 8.5 million b/d, up from 8.25 million b/d for the same period last year.

Inventories of gasoline are well above year-ago levels, so barring any unforeseen supply disruptions, prices should not spike this summer as they did the past 2 years. The average price for all grades of unleaded gasoline for the month of May, as reported by the US Department of Energy, was $1.51/gal this year, $1.81/gal in 2001, and $1.55/gal in 2000.

Distillate

Distillate demand currently is off sharply from a year ago and is projected to decline 2.4% for 2002.

First quarter demand averaged 3.8 million b/d. This is down 10% from the first quarter of last year, when heating oil demand ramped up as a result of cooler weather and high natural gas prices. By the fourth quarter of 2001, demand for distillate slacked off as natural gas prices had moderated and the cooled-off economy required less diesel for trucking.

Distillate demand is expected to recover somewhat in the second half of this year, with stronger economic conditions driving diesel demand and normal weather boosting heating oil consumption.

Jet fuel

Demand for jet fuel remains suppressed following Sept. 11, and is projected to decline about 3% this year.

The Air Transport Association of America Inc., a trade group for US airlines, reported that April passenger enplanements in the US were down 13% from a year ago, and capacity had declined 11% year-over-year. The number of commercial flights has been on the rise, however, and an especially weak first quarter will give way to slightly stronger jet fuel demand in the second half of the year.

Jet fuel demand climbed each year from 1996 until last year, when it averaged 1.65 million b/d vs. a 2000 average of 1.73 million b/d.

Residual fuel oil

US demand for residual fuel oil will decline 14% this year, OGJ predicts, following an unusually strong 2001.

The weakness will result from a decrease in use during the first half of the year when warm winter weather curtailed demand, as well as from a decrease in fuel switching by power generators since natural gas prices have moderated from first half 2001 levels. Through the first 4 months of this year, resid demand averaged 34% lower than for the same period last year.

Resid demand peaked in 1977 at 3.1 million b/d and fell each subsequent year until 1998, when falling oil prices helped it rebound a bit. OGJ expects that average resid demand this year will be 800,000 b/d.

LPG, other products

Demand for LPG declined last year but is expected to recover to 2.15 million b/d, up nearly 6% this year. Increased use of petrochemical feedstocks to supply a growing economy will lift demand for LPG.

Demand for all other products, such as lubes, asphalt, petroleum coke, and still gas, will also move up this year. Demand growth for this category is pegged at 1.3%, putting total consumption at 2.6 million b/d. These products are in greater demand when there is increased construction and industrial activity, as well as more highway spending.

US petroleum supply

Total US liquids production will increase 1.3% this year to 8.2 million b/d. This will be the second year in a row that crude and condensate production increases, following a decade of declines. Production of natural gas liquids, having dipped last year, is also expected to move up.

US production of crude and condensate is forecast to average 5.9 million b/d, up from 5.85 million b/d last year. In 2000, production slipped to 5.82 million b/d from 5.88 million b/d a year earlier.

Production of crude and condensate in Alaska has been steadily slipping in recent years. Alaskan oil output last year averaged 968,000 b/d, down from 970,000 b/d a year earlier and 1.05 million b/d in 1999. So far, early estimates indicate that oil production in Alaska will register a small uptick for the year; if this happens, it will be the first time since 1991. For the first 4 months of 2002, EIA estimates Alaskan oil output at an average 1.03 million b/d. This compares with an average 988,000 b/d for the same period last year. OGJ also expects a small boost in production this year from the Lower 48.

US production of natural gas liquids is rebounding from last year. Natural gas prices were so strong during the first quarter of 2001 that it was uneconomical to extract the liquids from the gas stream. First quarter 2002 NGL production averaged 1.88 million b/d vs. 1.65 million b/d for the same period a year earlier.

OGJ forecasts that 2002 production of NGL and other liquids will average 2.3 million b/d, a 2.4% increase over last year.

Imports

Total US industry imports will decline this year, but the drop will be less than 1%. Excluding those bound for the Strategic Petroleum Reserve, imports will average 11.5 million b/d for the year.

Crude will comprise 9.1 million b/d of total industry imports this year. This will be a negligible drop from year-ago imports. US crude imports were up last year to 9.14 million b/d from 9.06 million b/d and have risen each year over the past decade, except for a dip in 1998.

Last year, the US imported more oil from Saudi Arabia than from any other country. Crude imports from Saudi Arabia averaged 1.61 million b/d, while imports from Mexico were 1.38 million b/d, and imports from Canada were 1.32 million b/d. The fourth and fifth largest sources of US crude imports last year were Venezuela and Iraq.

OGJ expects product imports to decline 3% this year, averaging 2.4 million b/d. Plentiful stocks amid weak demand lowered first quarter average imports of products to 2.2 million b/d from 2.9 million b/d a year ago.

The largest exporter of products to the US last year was Canada, with an average of 466,000 b/d, followed by the US Virgin Islands, Algeria, and Venezuela.

Total imports met 59% of US demand last year. OGJ expects that this year's total import dependency will be 58%.

Imports of crude for the SPR averaged 11,000 b/d last year, up from 8,000 b/d in 1999 and 2000 and none during the 4 years prior.

Stocks

OGJ forecasts that while stocks of crude in the SPR will increase this year, industry inventories of crude and products will shrink by year's end.

SPR stocks finished 2001 at 550 million bbl. By the end of May, they had built to 570 million bbl, and should continue to increase throughout 2002. The SPR is still being replenished from a fourth quarter 2000 draw that took inventories down to 541 million bbl.

Industry stocks of crude stood at 312 million bbl at the end of last year and have fluctuated through the first half of 2002. OGJ expects crude inventories to end the year at 300 million bbl.

Product inventories have been especially stout this year as a result of weak demand. The product stockbuild began in the fourth quarter of 2001. As the economy continues to recover this year, however, some of the pressure on stocks will be alleviated. Product stocks are expected to end this year at 705 million bbl, down from 723 million bbl at the end of last year.

Refining

High product stock levels and high crude prices are combining to put a pinch on refining margins. The May cash operating margin for Gulf Coast refiners, according to Muse, Stancil & Co., was $1.05/bbl, compared with $2.50/bbl for April and $3.05/bbl for March. For the first five months, the refining margin has averaged $1.90/bbl, down from $4.57/bbl for the same period last year.

The refiners' acquisition cost of crude is forecast at $22.50/bbl this year, up from $22.96/bbl last year.

Capacity utilization is expected to dip to 92%, slightly below last year's level as refiners pull back on processing earlier in the year than usual in order to deflate the bubble of oversupply. Operable capacity is pegged at 16.8 million b/d, up from 16.65 million b/d last year. Total inputs will also be up over year-ago levels, but less so than capacity.