Non-OPEC Supply To Test OPEC's Quota Resolve In Second Half

Robert J. Beck
Associate Managing Editor-Economics

Major production gains are expected in the North Sea, Latin America, and non-OPEC Africa. Smaller increases are expected elsewhere.

Stocks grew during the first half of the year and can be drawn down later in the year to meet seasonal demand gains. Stored oil will reduce the requirement for new production and possibly for OPEC oil in the second half of this year.

Crude prices thus will depend upon the ability and willingness of OPEC to trim output to levels close to the group's quota and forgo a portion of market share.

Demand is expected to remain strong, supported by economic growth in developing countries, particularly the rapidly growing economies of the Asian-Pacific region, and the slower but steady growth in the industrial members of the Organisation for Economic Cooperation and Development (OECD).

The U.S. economy continues to expand steadily. It registered one of the strongest growth rates in a decade during the first quarter of this year. Increased economic activity translates into increased energy demand.

In the major industrial countries of Europe economic growth has accelerated, stimulating demand for energy and oil. Real gross domestic product (GDP) for the European Union is projected to be up 2.3% in 1997, compared to 1.6% in 1996 and 1995. Real GDP in the Asian developing countries is projected to increase 7.5% in 1997, compared with 8% in 1996. The economic growth rate for developing countries in the Western Hemisphere is projected at 4% in 1997, compared with 3% a year earlier.

The International Energy Agency (IEA) expects sharply higher oil consumption in 1997 in all of these regions. In addition, petroleum demand in the former Soviet Union (FSU) is expected to level off at the 1996 rate of consumption after falling since 1989.

The continuing challenge for OPEC will be to balance world supply and demand at an acceptable price level in the face of increased non-OPEC and growing production capacity among its members. What will happen with regard to Iraqi production is still a major unknown. Under a United Nations agreement, Iraq is exporting 700,000-800,000 b/d to raise money for humanitarian services. When sanctions are lifted, however, the country is thought to be capable of raising production to 3-3.5 million b/d. When that might happen remains an important question for the market.

For OPEC, adherence to quotas means production cuts for the several members that overproduced during the first half. Reining them in means persuading them to sacrifice export volumes and market share-never an easy task.

Still, the current quota is close to expected second-half demand for OPEC oil; strict adherence to that production formula could balance the market.

Among non-OPEC producers, the U.S. has scored an achievement by ending a long slide in its production of crude oil and liquids. Technology has revived mature fields and helped operators find new ones, and improved terms on federal leases have stimulated activity in the deepwater Gulf of Mexico.

The combination of factors is expected to stabilize U.S. oil output or at least keep the decline well below rates of recent years.

In keeping with increased demand and somewhat higher prices, drilling activity worldwide has increased. The international rig count (excluding the U.S. and Canada) averaged 806 for the first 5 months of 1997, compared with 784 a year earlier. The Canadian rig count averaged 326 vs. 246 for the same periods in 1996. The U.S. rig count averaged 879 for the first 5 months vs. 726 a year earlier.

In the second half of 1997, demand for crude oil and petroleum products is expected to remain strong worldwide, with crude prices reflecting how well OPEC manages its surplus producing capacity.

The oil market

In the first half of 1997, crude prices weakened while demand for petroleum products strengthened.

According to the IEA, total worldwide demand averaged 73.05 million b/d during the first half of 1997, up from 71.55 million b/d for the same period a year earlier. OECD demand was up modestly as growth in economic activity in the industrial countries was partially offset by winter weather warmer than a year earlier. OECD demand averaged 41.15 million b/d for the first half, compared with 40.9 million b/d last year. Last year demand in both the U.S. and Europe was boosted by cold winter weather.

Estimated demand also increased in Asia, China, the Middle East, and Latin America. In Asia, the demand average jumped to 9.15 million b/d for the first half this year from 8.6 million b/d a year earlier. The increases in these regions were only partially offset by a modest drop in FSU consumption, which averaged 4.3 million b/d this year compared to 4.4 million b/d in first-half 1996. The IEA estimated FSU demand for the second quarter of 1997 at 4.3 million b/d, compared with 4.2 million b/d last year.

Prices began to weaken in 1997 as non-OPEC output rose to an average of 44.55 million b/d for the first half from 43.35 million b/d last year. Increased North Sea output helped boost OECD production to 18.65 million b/d from 18.25 million b/d last year.

In non-OECD developing countries production increased to 24.3 million b/d from 23.6 million b/d in the first half of 1996. There were strong increases in output in Latin America and non-OPEC Africa.

Demand for OPEC oil was strong in the first half, partially due to an increase in stocks. Demand for OPEC liquids averaged 29.8 million b/d, compared with 28.2 million b/d in the first half a year earlier. Output included crude production of 26.9 million b/d and NGL and condensate output of 2.9 million b/d.

One of the big market differences from a year earlier was the net addition to stocks, amounting in the first half to 1.3 million b/d. In the same period last year there was no net addition to stocks as reductions in the first quarter were offset by increases in the second. This year there was a modest build up of 300,000 b/d in the first quarter, when stocks usually are reduced to meet winter heating demand. That was followed by a massive stock build in the second quarter that OGJ estimates at 2.3 million b/d.

Part of this build up was needed by the industry to provide a contingency cushion, since stocks had been drawn down close to minimum operating levels. However another portion of the stocks will be used to meet product consumption later in the year and cut into the demand for crude oil from producers.

During the first half of the year OPEC was producing well above its stated quota of 25.033 million b/d. First half OPEC crude production was about 1.85 million b/d above the quota. The demand surge and stock build absorbed the overproduction, but prices declined as the first half progressed.

Worldwide outlook

IEA expects total worldwide demand for petroleum products to increase 1.8 million b/d to an average 73.7 million b/d for 1997. Demand is expected to move up through the remainder of this year and reach 75.9 million b/d in the fourth quarter.

In the industrial countries of the OECD, IEA forecasts average demand of 41.6 million b/d in 1997, up 400,000 b/d from 1996. In non-OECD Asia, demand will also move up 400,000 b/d to average 9.2 million b/d.

Helping to meet that demand gain will be an increase of 1.6 million b/d that IEA expects in non-OPEC liquids supply for 1997, most coming in the second half of the year. The increase will push average non-OPEC output for 1997 to 45.2 million b/d.

IEA expects OECD crude oil supply to be up 600,000 b/d in 1997 at 19 million b/d. It will reach 20 million b/d in the fourth quarter.

A turn-around in FSU liquids output will also boost non-OPEC supply. FSU production has been falling since 1988, when it exceeded 12 million b/d. It was down to an average 7 million b/d for 1996. Production is expected to average 7.1 million b/d this year.

IEA expects output from Latin America to move up 500,000 b/d to average 7 million b/d for the year. Production from non-OPEC Africa is forecast at 2.9 million b/d, up 200,000 b/d.

The increases in non-OPEC output will have a large impact later in the year. Total non-OPEC supply for the fourth quarter is estimated at 46.7 million b/d, up 2.4 million b/d from the fourth quarter of 1996.

On balance, demand for OPEC liquids will change only slightly for all of 1997 and probably will drop in the second half.

An important variable in this outlook is behavior of stock levels. According to IEA, there was a small net addition to worldwide stocks last year, about 100,000 b/d. If the average stock build for all of 1997 is 500,000 b/d, demand for OPEC total liquids will increase to 29 million b/d from 28.5 million b/d in 1996.

World demand in the second half of this year is estimated by IEA to average 74.3 million b/d, up 1.25 million b/d from the first half. Non-OPEC supply for the second half is projected to average 45.95 million b/d, up 1.4 million b/d from the first half.

After the long and unseasonal stock build of the first half, a net reduction in inventories is likely in the second half, particularly during the start of the winter heating season in the fourth quarter.

The combination of a surge in non-OPEC supply and a drawdown in stocks will cut second-half demand for OPEC liquids. OGJ expects OPEC total liquids output in the second half to fall to 28.5 million b/d from 29.8 million b/d in the first half.

With IEA projecting average OPEC production of NGL and condensate to rise to 3.5 million b/d in the last half of the year, the call on OPEC crude oil, to which quotas apply, will fall to an average 25 million b/d from 26.9 million b/d in the first half this year and 26.1 million b/d in the last half of 1996.

Facing a reduced call on its crude and the continuing possibility of rising exports from Iraq, OPEC last month extended its quota 25.033 million b/d, which includes an allowance for Iraq of 1.2 million b/d.

Crude oil prices

On average, world crude oil prices during the first half of this year were up from the same period a year earlier. But prices at mid-year were well below year-ago levels. Last year prices strengthened during the course of the year; this year the pattern has reversed.

World export crude oil prices for the first half of 1997 averaged $19.18/bbl, up from the $18.62/bbl for the first half of 1996. But the average price for June this year is an estimated $17.58/bbl vs. $18.26/bbl for June last year. Although petroleum demand remains strong worldwide, increased supply is putting the downward pressure on prices.

The world export crude price started the year strong, averaging $23.06/bbl in January. But as demand fell after the winter heating season and supplies worldwide moved up, the price weakened, falling to an average of $17.13/bbl in April. Prices strengthened in May at $18.15/bbl and then slipped again in June.

The pattern was similar for both OPEC and non-OPEC export crudes. The average price for OPEC export crude oil was $18.83/bbl for the first half of 1997, compared with $18.13/bbl for the same period of 1996. The price for non-OPEC crude oil averaged $19.51/bbl during the first half this year, up from an average of $19.31/bbl for the same period a year earlier.

The price weakness that appeared toward the end of the first half of the year is expected to continue. It is expected that on average crude oil prices for the year will finish lower than the year before.

On the New York Mercantile Exchange (Nymex), the futures price for light sweet crude oil began the year high and slid throughout the first half. The futures price averaged $25.24/bbl in January and slipped to $19.18/bbl in June. For the first half of the year the Nymex price averaged $21.35/bbl, up from $20.57/bbl for first half 1996.

The average posted price for West Texas Intermediate (WTI) crude oil averaged an estimated $20.51/bbl for the first half this year, up from $19.74/bbl for the same period last year.

The U.S. average wellhead price averaged $20.59/bbl for January and February this year, the latest data available, up from $15.49/bbl for the same period a year earlier. OGJ is projecting an average annual U.S. wellhead price of $17/bbl for 1997, down from $18.46/bbl in 1996.

Product prices

Lower crude costs will cut product prices despite rising demand this year.

According to the OGJ survey of self-service unleaded motor gasoline pump prices, the average price for the first half of 1997 was $1.235/gal, up from $1.204/gal last year. And the average motor gasoline price excluding all federal, state, and local taxes was 83.9?/gal, up from 80.9?/gal a year earlier.

However, prices had weakened during the year and in June were lower than the year-earlier level: $1.235/gal vs. $1.295/gal.

The OGJ survey showed the pump price averaging $1.255/gal in January, up from $1.112/gal a year earlier. The pump price slipped to $1.219/gal in April and moved up marginally as the driving season started. A year earlier pump prices moved up sharply in May and stayed high throughout the year.

Federal, state, and local gasoline taxes averaged 39.7?/gal for the first half of this year, compared with 39.5?/gal over the same period a year ago.

OGJ projects the pump price for all types of motor gasoline, including premium grades, to average $1.225/gal for 1997, down from $1.288/gal for 1996. The peak annual average pump price for motor gasoline was $1.353/gal in 1981.

Residential heating oil prices for the first 2 months of 1997 averaged $1.065/gal, compared with 95.3?/gal a year earlier. The increase was primarily due to higher crude oil prices and continued strong demand for distillate related to economic growth. OGJ expects heating oil prices will slip as crude prices fall and average 92?/gal for the year, down from 98.9?/gal last year. Stronger distillate demand due to colder than normal weather or more-robust economic growth could push prices higher than anticipated.

Natural gas prices

Natural gas prices started this year high relative to the start of 1996 but by March had fallen below year-earlier levels because of weakening demand.

Spot natural gas prices started the year at $3.96/MMBTU in January, up 54% from the level a year earlier, then fell to $1.65/MMBTU in March. Prices moved up to $2.16/MMBTU for June. The natural gas spot price averaged $2.38/MMBTU for the first half of this year compared to an average of $2.23/MMBTU for the first 6 months of 1996. Last year spot prices surged late in the year in a pattern unlikely to repeat in 1997.

The Nymex futures price averaged $2.23/MMBTU in the first half, compared with $2.42/MMBTU last year.

The average U.S. wellhead price for natural gas averaged $3.58/Mcf for January, the only data available. This was up 72% from January a year earlier.

The average annual natural gas wellhead price peaked in 1984 at $2.66/Mcf, then dropped to $1.67/Mcf in 1987. It stayed within a range of $1.64-1.71/Mcf during 1987-91, then rose to $1.74/Mcf in 1992 and $2.04/Mcf in 1993. The price fell to $1.85/Mcf in 1994 and $1.55/Mcf in 1995.

Natural gas demand for the first 4 months of this year, the latest data available, was down 1.6% from the same period of 1996, when extremely cold weather elevated consumption. Demand later this year is expected to move ahead of year-ago levels due to continued economic growth and competitive prices. In addition, working gas in storage has been drawn down and will need to be replenished.

Gas prices are expected to remain steady in the second half, particularly in utility and industrial markets where natural gas competes with heavy fuel oil and coal. OGJ projects an average U.S. wellhead price of $2.05/Mcf for 1997, down from $2.25/Mcf in 1996. This is based on an expected 0.9% increase in U.S. natural gas consumption this year.

U.S. outlook

OGJ expects the U.S. economy to continue its expansion in 1997. With inflation apparently under control, the Federal Reserve is not expected to raise interest rates. The unemployment rate is at the lowest level in a decade or more and may put upward pressure on prices later in the year, but there is no evidence that this is happening yet. Growth in industrial production is expected to slow. Auto sales and housing starts are expected to be slightly lower than their levels a year ago.

The U.S. economy has been growing slowly but steadily since the latest recession in late 1990 and early 1991. OGJ assumes that annual 1997 gross domestic product (GDP) will be up 2.6% from the 1996 level. GDP increased 2.4% last year.

Growth rates reflect the government's new method of calculating real GDP, which results in figures slightly lower than they were under the old method. The new, chain-weighted system does a better job of adjusting for large price swings, such as the sharp drop in the cost of computing power, and measuring the true growth in goods and services.

The U.S. economy's current growth cycle is in its sixth year. Before last year's growth, GDP moved up 2.7% in 1992, 2.3% in 1993, 3.5% in 1994, and 2% in 1995.

This year industrial production is expected to increase an estimated 2.5% following an increase of 3% in 1996. New car sales are expected to total 8.4 million units in 1997, compared with 8.8 million last year. Housing starts are projected to fall to 1.3 million units from 1.4 million in 1996.

U.S. energy demand

Energy consumption will rise in 1997 but won't keep up with economic growth because of continuing improvement in energy use efficiency and conservation.

Total U.S. energy consumption will move up 0.9% this year, compared with 3% in 1996. Energy consumption will move up to 90.6 quadrillion BTU (quads) for 1997 from 89.814 quads in 1996.

Energy consumption declined in the early 1980s but started increasing as the economy grew. During the last growth cycle of 1982-90, energy consumption grew at an average rate of 1.7%/year. That was less than half the 3.6%/year average growth rate of GDP.

In the last recession, energy consumption declined 0.1% in 1990 and 0.2% in 1991. Since then energy consumption has increased at an average rate of 2%/year. This compares to average economic growth of 2.6%/year.

Since 1970, improvements in energy efficiency have kept the energy consumption growth rate below that of the economy. In 1996 the increase in energy consumption, 3%, exceeded growth in the economy, 2.6%.

The amount of energy needed to produce a unit of economic growth fell 34% during 1970-96. Energy consumption per unit of GDP was 19,800 BTU in 1970 and 13,000 BTU in 1996. OGJ expects energy consumption per unit of GDP to decline to 12,800 BTU/$ in 1997. The rate of growth in energy consumption tracks closer to GDP growth during periods of rapid economic expansion and periods of low energy costs.

Sector demand

Oil energy demand is projected to move up 0.9% in 1997 to 36.05 quads. Energy from oil increased 3% in 1996. Strong economic growth in the first quarter of this year and lower product prices should offset the effect of warmer weather and boost demand modestly.

Oil's share of total energy demand will remain at 39.8%, the same as the last 2 years. It was 40.6% in 1994. In 1978, the year of peak oil consumption, the market share was 48.6%.

Demand for energy from natural gas will also increase 0.9% in 1997 to 22.71 quads. This compares to a 1.5% increase last year. Higher natural gas prices have slowed the growth rate the past 2 years. The natural gas market share will remain at 25.1%, compared with 25.4% in 1995 and 24.9% in 1994. Together oil and natural gas will provide 64.9% of the energy consumed in 1997, the same as last year.

Increased electric power consumption will boost demand for coal energy by 1.4% in 1997 to 20.78 quads. This follows an increase of 4.5% in 1996. Coal's market share will rise to 22.9% in 1997 from 22.8% last year and 22.5% in 1995.

Energy from hydroelectric and other energy sources is expected to fall 2.8% in 1997 to 3.83 quads. This follows increases of 10% last year and 12.5% in 1995. The market share will slip to 4.2% from 4.4% in 1996. Hydro power output had been well below capacity for several years because of drought conditions in the western U.S., but in 1996 it was back close to capacity. Other energy sources such as geothermal, wind, wood, and solar provided only 0.1% of total energy consumed in the U.S. in 1996.

Nuclear energy output is expected to increase 0.9% this year to 7.23 quads. This follows a slight decline of 0.1% last year. Nuclear's market share is expected to remain at 8% in 1997. Nuclear energy output had been moving up gradually due to an increase in the capacity utilization rate. The rate hit a record high 77.4% in 1995 but slipped to 76.4% last year. There are no plans to add nuclear units, and total industry capacity is leveling off. Expectations are for modest growth in nuclear energy output for a few years as the industry continues to boost capacity utilization.

Stagnation of nuclear power generation will force the electric power industry to turn to other fuel sources, probably coal and natural gas.

U.S. natural gas

U.S. consumption of natural gas is expected to increase 0.9% in 1997 to 22.1 tcf. This follows increases of 1.5% in 1996 and 4.2% in 1995. Consumption of natural gas has moved up since the recent low of 16.221 tcf in 1986. The record high for natural gas consumption was 22.101 tcf in 1972.

The long rise in demand for natural gas is in part due to elimination in 1989 of a variety of federal controls on use and prices. Relaxation of end use controls has enabled natural gas to compete with other fuels.

The industrial sector has accounted for 56% of the increase in consumption since 1986. Industrial demand moved up from 5.579 tcf in 1986 to 8.784 tcf last year. Industrial sector consumption includes gas used in non-utility power generation.

Demand moved up in other major economic sectors. Over that same period commercial demand increased 38% to 3.209 tcf in 1996. Residential demand moved up 21% to 5.225 tcf. Demand for natural gas as a pipeline fuel and a lease and plant fuel increased 39% to 1.96 tcf.

Utility demand has been very volatile. This is the sector where natural gas has the most intense competition from other fuels. Utility demand reached a recent high of 3.197 tcf in 1995 but fell to 2.732 tcf in 1996, up only 5% from the level in 1986.

The sharp increase in natural gas prices in 1996 was the reason for the drop in utility demand. The higher prices also slowed growth in total consumption. But in other economic sectors fuel switching is not as convenient, and the higher prices were offset by colder winter weather.

In 1997, prices lower than their levels of a year earlier are expected to raise gas demand in the utility sector and to a lesser extent in the industrial sector. Demand in the commercial and residential sectors is expected to drop due to warmer winter weather.

According to the Energy Information Administration (EIA), the cost of coal for steam electric utilities dropped steadily from $1.455/MMBTU in 1990 to $1.318/MMBTU in 1995 and $1.289/MMBTU in 1996. The cost of natural gas for these utilities was $2.321/MMBTU in 1990, moved up to $2.56/MMBTU in 1993, slipped to $1.984/MMBTU in 1995, then jumped to $2.641/MMBTU last year.

In January this year the gas price had jumped to $4.058/MMBTU. This improved the competitive advantage of coal, and even heavy fuel oil was less expensive. But the futures market price for natural gas fell from $3.03/MMBTU in January to $1.98/MMBTU in April so improvement in the competitive position of gas is likely to show improvement when comparative price data are available for subsequent months.

U.S. marketed production of natural gas is expected to increase again in 1997 as consumption rises and the industry refills storage. Domestic production is projected to move up 1.8% to 20.3 tcf in 1997. This follows an increase of 2.3% in 1996.

In recent years U.S. gas production has risen in response to the increase in demand and to higher average wellhead prices.

Domestic output hit a peak of 22.648 tcf in 1972 but slipped to a recent low of 16.859 tcf in 1986. Since then output has moved up at an average rate of 1.7%/year to 19.947 tcf in 1996. This compares to an average increase in natural gas consumption of 3.1%/year over the same period.

Imports have provided a large part of the increase in supply. Imports of natural gas, mainly from Canada, moved up from 750 bcf in 1986 to 2.868 tcf last year and are projected to increase 3.6% in 1997 to 2.97 tcf. Last year imports increased 1%.

Imports from Canada are projected to move up 2.9% in 1997 to 2.895 tcf. Canadian imports slipped in 1996 to 2.814 tcf from 2.816 tcf in 1995. This year there will be a small supply of LNG, 60 bcf, from Algeria and the United Arab Emirates. This compares to LNG imports of 40 bcf in 1996 and only 18 bcf in 1995. There will also be a modest level of imported gas from Mexico, 15 bcf, in 1997, compared to 14 bcf last year.

Since the recent low in 1986, consumption has moved up 5.69 tcf, domestic dry gas production is up 2.966 tcf, and total imports have increased 2.118 tcf.

U.S. petroleum demand

U.S. demand for petroleum products for the first half of this year moved up modestly from year earlier levels. Robust economic growth boosted consumption and more than offset the impact of warmer winter weather. Falling product prices also helped boost demand.

Petroleum product demand in the U.S. averaged an estimated 18.23 million b/d for the first half, up 0.7 % from the same period a year earlier.

Increases were posted for all of the major product categories except residual fuel oil. The sharpest first half increases were posted by motor gasoline and jet fuel, both up 1.2% from a year earlier.

Resid demand slumped due to warmer weather and high prices at the start of the year. Resid consumption was down 5.1% from the first half last year.

First half demand increases for the other major product groups were distillate 1%, LPG and ethane 0.2%, and all other petroleum products 0.9%.

Heating degree days for the first 4 months of 1997 were down 6.9% from the same period in 1996 and down 4.4% from normal. The warmer weather cut demand for distillate, resid, and other products used for heating.

Economic growth and stable or lower prices will raise demand for petroleum products in the second half by 1% from a year earlier to an average of 18.55 million b/d.

For all of 1997, U.S. demand for petroleum products is forecast at an average 18.39 million b/d, up 0.9% from the level in 1996. This will be the sixth consecutive year with increased product consumption. Demand moved up 2.9% in 1996 after a marginal 0.04% gain in 1995 and 2.8% in 1994.

U.S. product consumption is slowly approaching a record high. Demand hit the all time high of 18.847 million b/d in 1978 but then fell sharply to 15.231 million b/d in 1983, due to rising crude oil and product prices.

Motor gasoline

Motor gasoline demand for the first half of this year was up an estimated 1.2% from a year earlier, averaging 7.84 million b/d. Increased personal income has boosted the vehicle fleet and miles driven and reduced the need to conserve on personal and business driving. Lower motor gasoline pump prices entering the summer driving season also stimulated demand for motor gasoline.

Through the first half of the year pump prices on average were 2.3% ahead of a year ago. Pump prices started the year substantially above year-earlier levels but by April had fallen below the same month in 1996. The average pump price for all types of motor gasoline for May and June was $1.295/gal vs. $1.366/gal in the same period a year earlier.

The decline was due primarily to lower crude oil prices, which offset the expense of producing reformulated gasoline. The average tax on motor gasoline remained at an estimated 39.6?/gal.

For the year motor gasoline demand is projected to average 7.95 million b/d, up 1.3% from 1996 and a record high for U.S. consumption. Records have been set each of the last 4 years in spite of the improvement in efficiency of U.S. autos. And through 1997 demand will have increased for 6 consecutive years, up 10.6% from 1991.

The recent upturn in motor gasoline came after demand fell to a low of 6.539 million b/d in 1983 in response to sharp price increases. In the earlier cycle, motor gasoline demand hit a high of 7.412 million b/d in 1978.

The current rising trend is attributable to the growth in economic activity and personal income, population growth, an increase in the size of the vehicle fleet, and an increase in the average miles driven per vehicle. Improvement in vehicle fuel efficiency have partly offset those factors. Lately, consumers have opted for less fuel-efficient light trucks and four-wheel-drive sport utility vehicles.

EIA says vehicle fuel-mileage hit 21.69 mpg in 1991 and slipped to 21.04 mpg in 1993. But it reached 22.56 mpg in 1995. Back in 1973 the average was only 13.3 mpg.

In addition, mileage driven moved up steadily from 9,141 miles/vehicle in 1980 to 11,760 miles/vehicle in 1993. It slipped to 11,329 miles/vehicle in 1995.

Distillate

Distillate fuel oil demand during the first half of this year was up an estimated 1% from the same period last year. Economic activity boosted merchandise shipments and demand for transport fuels. This was partially offset by warmer winter weather.

For the year OGJ projects distillate demand of 3.4 million b/d, up 1% from 1996. Increases in demand are expected in all economic sectors, with transportation leading the way.

Resid

Demand for residual fuel oil fell to 820,000 b/d in the first half, down 5.1% from the same period in 1996. Demand for resid has fallen for 8 consecutive years and has been on a downward trend for almost 20 years. It peaked at 3.071 million b/d in 1977.

Last year cold weather in the first quarter helped support demand. This year, with closer to normal weather, consumption continued to slide. And high oil prices early in the year reduced the competitive position of resid in the utility and industrial sectors.

Utility demand for fuel oil for the first 2 months of 1997 was down 23.1% from the same period in 1995. An increase in hydroelectric output and competition from coal were the primary reasons. Natural gas now also is competitive with resid in the utility and industrial sectors; prices have fallen from the lofty levels early this year .

Resid demand for all of 1997 is forecast to average 820,000 b/d, down 2.5% from 1996. Demand will move up slightly in the fourth quarter to 830,000 b/d but remain generally weak throughout the year.

LPG, other products

Demand for LPG and ethane is projected to average 2.02 million b/d in 1997, up 0.3% from 1996. Demand during the first half was up 0.2% at 2.02 million b/d. Increased chemical consumption associated with the growing economy has helped demand.

Demand for other petroleum products is expected to increase this year by 0.6% to 2.6 million b/d. During the first half of 1997 demand for these products averaged 2.51 million b/d, up 0.9% from 1996. Boosting demand will be increased construction activity, more driving and industrial activity, and greater spending on highways. Included in this category are petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt and road oil, still gas, and miscellaneous products.

U.S. petroleum supply

The decline rate for U.S. production of crude oil and lease condensate slowed in 1996. And output is expected to slip only modestly in 1997.

Production during first half 1997 averaged an estimated 6.445 million b/d, down 0.8% from the first half of 1996. Declining Alaskan North Slope production is pulling down the total.

Lower-48 production has stabilized. Oil prices are down from year-ago levels, but this is not expected to significantly reduce investment in secondary recovery projects, workovers, and other activities that slow the decline rates in old fields. And the surge in exploration and development activity in the Gulf of Mexico is adding production.

During the first half, Alaskan output averaged 1.347 million b/d, down from 1.418 million b/d in the first half of 1996. Alaskan production was as high as 2.031 million b/d during first half 1988 and averaged 2.017 million b/d that year.

Lower-48 production increased 0.5% in the first half this year to average 5.098 million b/d. Lower-48 output had been falling steadily for a number of years. Lower-48 crude and condensate production had fallen from 9.01 million b/d in 1973 to an average 5.075 million b/d in 1996.

The decline in total U.S. output will flatten in the second half of the year. OGJ projects second half output of 6.415 million b/d. For the year crude output is projected at an average 6.43 million b/d, down 0.6% from 1996.

Total U.S. crude and condensate output this year will be at the lowest level since 1954 and will be down 28% from the recent high of 8.971 million b/d in 1985.

U.S. crude oil production hit a peak in 1970 at 9.637 million b/d. Production then slipped to 8.132 million b/d in 1976, just prior to the addition of North Slope Alaskan output. Increases in Alaska coupled with a boom in Lower-48 drilling activity raised production to 8.971 million b/d in 1985. Production has been sliding since 1986 due to the sharp drop in oil and gas prices and drilling activity and the recent decline in North Slope output.

But in recent years producers have been finding ways to cut costs and have been investing in new technology. They have worked on developing new seismic, drilling, completion and recovery technologies that have improved the return on investments. They are now finding and producing more oil per discovery, per well, and per rig than they did in the past.

The production of NGL plus other hydrocarbon liquids averaged 2.15 million b/d for the first half of 1997, up 3.1% from the same period the year before. Production of NGL and other liquids is projected to average 2.18 million b/d for the year, up 1.8% from 1996. Since 1993 this production category has included methyl tertiary butyl ether and fuel ethanol.

U.S. total liquids production is projected to average 8.61 million b/d in 1997, almost unchanged from the 8.613 million b/d average for 1996. Total liquids production this year will be down 19% from the recent high of 10.636 million in 1985.

Refining

Over the past few years there have been modest increases in total U.S. operable refining capacity after declines of the 1980s and early 1990s.

Operable capacity averaged 15.43 million b/d during the first half of 1997 and is expected to remain at about this level through the remainder of the year. Therefore, for the year operable refinery crude capacity is expected to be 15.43 million b/d vs. 15.318 million b/d in 1996. Increases in product demand and a sustained period of positive refining margins in the first half have encouraged refiners to boost capacity at existing facilities. But construction of major new refineries is unlikely, hampered by additional costs and permitting problems related primarily to environmental regulations.

During 1984-92 capacity fluctuated in a range of 15.5-15.9 million b/d. Product demand was rising during this period, and utilization rates moved up. But capacity fell to 15.143 million b/d in 1993 and 15.15 million b/d in 1994 as margins weakened and the need to invest in old facilities to meet new fuel specifications forced some refineries to close. The refinery utilization rate climbed to 92.6% in 1994.

Capacity moved up in 1995 to 15.346 million b/d and slipped to 15.318 million b/d in 1996. Input to distillation units continued to climb, pushing the capacity utilization rate to 93.5% in 1996. That is close to full sustainable capacity, since some capacity is required for maintenance downtime and contingencies.

Crude input to refineries is projected to be up 0.6% this year at 14.27 million b/d, and total input to distillation units will move up 0.6% to 14.41 million b/d. The increase in capacity will be slightly higher than the increase in throughput, so the average utilization rate will slip to 93.4%. However, the utilization rate in the third quarter will reach 95%.

Imports

Imports in 1997 will set a record high for the second consecutive year.

For the first half total industry imports were up 4.7% at 9.73 million b/d. This was partly due to an increase in product imports, which jumped 7.6% from year ago levels. The increased imports also helped raise stock levels during the first half of this year.

Industry imports are expected to remain at about the same level during the latter half of the year. Increased product demand will be balanced by a reduction in stocks and slightly lower domestic liquids production, leaving import requirements at the same level as in the first half of 1997.

Imports are projected to surge to 9.94 million b/d for the third quarter but fall to 9.52 million b/d in the last quarter of the year as stocks are reduced. For the year total imports are forecast at 9.73 million b/d, up 3.6% from last year.

Last year imports increased 6.4%, surpassing the previous record of 8.996 million b/d in 1994, as demand increased. The import gain occurred even though refiners sharply reduced stock levels to close to minimum operating levels.

The last time industry imports were close to this level was back in 1977, when they averaged 8.786 million b/d. Imports dipped to a recent low of only 4.949 million b/d in 1985 as a result of an increase in domestic production and a decrease in product demand, both related to the sharp rise in crude oil prices in the early 1980s.

Dependence on petroleum imports is expected to reach a record high this year. Imports will jump to 52.9% of domestic demand in 1997 from 51.5% last year and 49.8% in 1995.

Crude imports are projected to increase 3.1% in 1997 to a record 7.71 million b/d. Crude imports increased 3.4% last year. During the first half of this year crude oil imports averaged 7.67 million b/d, up 4% from first half 1996.

There have been no crude imports for the Strategic Petroleum Reserve (SPR) since June 1994. Recently, the future of the SPR has been tied to federal budget considerations. SPR holdings peaked at 592 million bbl in 1994 and 1995. Withdrawals in 1996 took the level to 566 million bbl. A withdrawal in January this year cut the total to 563 million bbl.

The Department of Energy (DOE) has announced that there will be no further sales of SPR crude. OGJ assumes the SPR will be held at current levels for the remainder of 1997.

Petroleum product imports are expected to move up 5.3% to average 2.02 million b/d this year, the highest product import level since 1990. Product imports increased 19.4% to 1.917 million b/d in 1996, even though stocks were drawn down sharply to help meet the surge in demand.

During the first half of this year product imports were up 7.6% from the level a year ago, at 2.06 million b/d. This has helped replenish product stocks, which had dipped to close to minimum levels at yearend 1996.

With continued strong demand, product imports are projected to average 1.98 million b/d over the second half of the year. This will be a slight reduction from the first half level since there is not expected to be any further net addition to product stocks.

With little excess refining capacity, future increases in product demand will require increased product imports.

The leading source of U.S. crude imports during the first quarter of this year was Venezuela, which supplied 1.264 million b/d, 17% of the total. This was followed closely by crude imports from Mexico at 1.251 million b/d and from Saudi Arabia, which supplied 1.219 million b/d.

Other countries supplying large volumes of crude to the U.S. during the first quarter were Canada 1.122 million b/d, Nigeria 559,000 b/d, and Angola 457,000 b/d. Total crude imports from the OPEC countries averaged 3.318 million b/d for the first quarter, 44% of total crude imports. Crude imports from OPEC averaged 3.437 million b/d during all of 1996.

Venezuela was also the leading supplier of product imports for the first quarter this year at 400,000 b/d. Canada was the next largest supplier of products at 366,000 b/d. That was followed by the Virgin Island refineries, supplying an average of 306,000 b/d, and Algeria at 303,000 b/d. Product imports from OPEC countries averaged 844,000 b/d, 40% of the total first quarter product imports.

Total imports from OPEC during the first quarter of this year averaged 4.162 million b/d. This was 43% of total U.S. imports in the first quarter. Last year OPEC provided 45% of total imports for the full year.

Stocks

Over the past couple of years stocks have played a larger than normal role in U.S. oil supply. Last year, for the second consecutive year, refiners favored stock drawdowns over increased imports. In addition, withdrawals from the SPR added to U.S. crude supply during 1996.

Total industry stocks finished the year at only 944 million bbl, down from 971 million bbl at yearend 1995 and 1.061 billion bbl at yearend 1994. Refiners have adopted stock management systems that minimize the cost of carrying crude and products as inventory.

Industry stocks continued to drop during the first 2 months of this year and fell to a low of only 919 million bbl at the end of February. However, falling crude prices stimulated a stock build up during the remainder of the first half, with the industry total moving up 37 million bbl to an estimated 981 million bbl at end June. This added about 204,000 b/d to overall oil demand during the first half of 1997.

The EIA has listed 892.8 million bbl as the observed minimum for total industry stocks. The EIA no longer defines this as a minimum operating level, but it does represent the lowest stock level registered over the last 36 months. In fact, this was the lowest industry stock level in decades.

It is expected that the stock build will continue through the third quarter, but then stocks will be reduced as oil demand increases in the heating season.

At yearend total industry stocks are projected to be 962 million bbl, 1.9% above the level a year earlier. Crude oil stocks are expected to finish the year at 300 million bbl, up 5.3% from yearend 1996. This will give refiners flexibility in meeting changing patterns of product demand. Product stocks are also expected to be increased and finish the year at 662 million bbl vs. 659 million bbl at yearend 1996.

At the end of the first half crude oil stocks were increased to an estimated 320 million bbl. The EIA has listed 285 million bbl as the observed minimum level for crude stocks, reached in December 1996.

At the end of the first half product stocks were estimated at 661 million bbl, down from 659 million bbl at yearend 1996. The observed minimum level for product stocks was about 593 million bbl, also at end March this year.

These observed minimums do not necessarily mean supply problems, but they do indicate points where availability could be tight and push up prices.

Refiners have generally been more willing to deplete product stocks than crude oil stocks. Crude stocks provide refiners with the flexibility to meet changes in demand for any product. However, with distillation capacity being used at close to maximum rates, refiners have little room to step up throughput to meet unanticipated surges in demand.

At yearend 1996 total industry stocks represented 51.8 days of supply at 1996 demand levels. That was the lowest stock level, in terms of days' supply, on record. This ratio has fallen sharply the last few years. At yearend 1995 stocks represented 54.5 days of supply, and at yearend 1994 stocks were at 59.9 days of supply.

In the 1960s total stocks of crude oil and products represented 68 to 82 days of current demand. In the 1970s this dropped to a range that varied from 58 to 70 days. In the 1980s stock coverage was at a high of 78 days of supply in 1981, when there was political pressure to build heating oil stocks; it fell to 58 days by yearend 1989. By the end of the 1980s refiners were managing stocks more efficiently and cutting inventory costs.

This year the modest increase in stock levels and increased demand will result in yearend 1997 stocks up slightly at 52.3 days of supply.

SPR stocks

The SPR grew steadily to 586 million bbl during 1977-90. The conflict in the Persian Gulf in 1990-91 led to a withdrawal of crude from the SPR, ostensibly to test the system's ability to dampen price fluctuations during emergencies.

There were no imports or additions to the SPR in 1991, and the level was down to 569 million bbl at yearend. Additions to the SPR resumed in June 1992 and continued in 1993 and the first half of 1994, reaching its peak of 592 million bbl.

Withdrawals of SPR crude in 1996 and 1997 were made to raise funds for the government.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.