The oil market is likely to tighten in 2007 with global demand for crude up by 1.7 million b/d, non-OPEC production growing by just 1 million b/d, and only a 1.1 million b/d increase in refining capacity, said Edward L. Morse, managing director and chief energy economist for Lehman Bros. Inc., New York.
World demand for crude rose by 5.2 million b/d from 2002 to 2005, or an average 1.7 million b/d/year. The consensus is for 2006 demand growth to be just over 1 million b/d, but Lehman Bros. puts it at 1.2 million b/d.
The reason for the 2006 demand reduction from the previous average was not the escalation of prices as some might speculate but the “incredible distortion” of supply and demand fundamentals caused by Hurricanes Katrina and Rita in 2005.
Damage inflicted by those hurricanes and the associated surge in energy prices depressed US demand until last April. But since April, US energy demand has been stronger than prehurricane 2005, Morse said Dec. 5 at an annual oil and gas conference hosted by Deloitte & Touche in Houston.
The 2006 market also was weighed down by fuel switching in electric power generation. US demand for residual fuel was reduced by 400,000 b/d as a result of lower natural gas prices. But Morse sees no room for further substitution in 2007.
Demand outlook
“Barring any unforeseen incidents, I can’t see how demand can fail to grow at less than 1.7 million b/d” in 2007, Morse said. He sees US oil demand increasing by 250,000-350,000 b/d in 2007, compared with an average growth of 293,000 b/d/year in 1995-2005. US demand for gasoline, diesel, and jet fuel should grow by 300,000 b/d, even if the 2006-07 winter proves to be warmer than normal. But cold weather and fuel substitution could add another 200,000 b/d or more, said Morse.
China’s demand growth is pegged at 500,000-700,000 b/d in 2007 from an average of 395,000 b/d/year in 1995-2005. Controlled product prices in China have resulted in “rationed demand,” said Morse. Chinese refiners have been losing money on domestic sales of petroleum products and have restrained production availability in response. As product prices are liberalized, that pent-up demand could add 150,000 b/d to China’s basic demand growth.
Other emerging Asian markets should add another 200,000 b/d of demand growth. The “torrid economic growth” in the Middle East “will likely add at least 350,000 b/d” of oil demand growth, Morse said.
Energy intensity-the measure of the energy efficiency of a nation’s economy, calculated as units of energy per unit of gross domestic product-is falling, Morse said. The amount of oil necessary to produce a given level of gross domestic production is declining as a result of “economic maturing,” conservation, and increased energy. In 1995-2005, global GDP growth averaged 3% vs. a 1.7% average oil demand growth.
Yet US oil intensity is almost double that of Japan and western European countries, while China and India stand at twice the world average. Oil-intensive countries, of course, run increased risks from sustained high crude prices, which have increased because of greater demand.
Morse noted the “gradual numbing” of consumers to higher oil prices, since world demand for crude increased annually September 2002-September 2005 despite rising crude prices.
Production outlook
The International Energy Agency in Paris and OPEC members expect non-OPEC supply growth to be equal to or better than demand growth. IEA is projecting non-OPEC production will grow 1.68 million b/d, while a more optimistic OPEC sees non-OPEC production growing by 1.77 million b/d. But Lehman Bros. figures non-OPEC production will grow by only 1 million b/d-“perhaps by much less, depending on disruptions in 2007.” Added production by non-OPEC countries will come primarily from off West Africa, the deepwater Gulf of Mexico, and the Caspian region, Morse said.
Morse said OPEC output would need to increase “by at least 700,000 b/d” to meeting incremental demand in 2007, but the cartel’s growth capacity is limited. That means tight oil markets in 2007, “perhaps very tight,” he said. At this point, crude production capacity all depends on developments within the OPEC countries, with continued political risks in Nigeria, Iran, Iraq, and Venezuela.
Lehman Bros. is projecting distillation and upgrading capacity to grow substantially by the end of this decade, with planned gross additions of 1.5 million b/d in 2008, 1.9 million in 2009, and 3.2 million b/d in 2010.
