US, worldwide energy demand growth rates to slow in 2011

Strong prices will keep oil demand growth in check in 2011. OGJ estimates that the average US wellhead price of crude oil last year was $74.75/bbl, up 33% from a year earlier.

With futures prices on the New York Mercantile Exchange (NYMEX) for oil delivered throughout 2011 climbing to above $90/bbl as of this writing and barring an unforeseen collapse in demand, the average wellhead price of oil this year easily could exceed last year's average.

Worldwide oil demand

Led by developing countries, global demand for oil will climb 1.3 million b/d to average 88.8 million b/d this year, according to the latest figures from the International Energy Agency.

Meanwhile, IEA estimates that this year's average oil demand will shrink slightly in the developed countries of the Organization for Economic Cooperation and Development (OECD), where many economies are still struggling with recovery but have a chance to achieve energy efficiency gains.

Oil demand growth in 2010 averaged 2.5 million b/d. This was led by a surge in demand for gas oil in the third quarter, when global oil product demand increased by 3.3 million b/d from a year earlier, IEA said.

IEA forecasts that oil demand in China will jump to average 9.7 million b/d from 9.25 million b/d last year, driven by gains in demand for jet fuel, naphtha, motor gasoline, and diesel. The Paris-based agency calls for total oil demand in India and other Asian countries outside the OECD to climb to 10.6 million b/d this year from 10.3 million b/d last year.

Middle East demand for oil will average 7.9 million b/d, up from the 2010 average of 7.5 million b/d, with demand in Saudi Arabia climbing to 2.81 million b/d from last year's 2.66 million b/d.

Oil demand will increase about 200,000 b/d in both the former Soviet Union and Latin America due to rising demand in Russia and Brazil.

In North America, IEA forecasts flat demand in the US, with Canadian demand slipping to 2.22 million b/d this year from 2.23 million b/d. In Mexico, demand is forecast to average 2.16 million b/d this year vs. 2.14 million b/d last year.

Demand for oil in Japan will decline by about 160,000 b/d this year to average 4.22 million b/d, according to the IEA, while OECD European oil demand slides to 14.28 million b/d from last year's 14.37 million b/d.

Global oil production

Due to output gains in non-OECD countries this year, worldwide supply of crude oil and natural gas liquids will increase by 1.4 million b/d to average 88.6 million b/d, according to IEA.

Total OECD production this year will dip, as flat supply in Europe and a small decline in North America-due in part to drilling delays in the US Gulf of Mexico-outweigh a small increase in production in the Pacific OECD countries.

IEA forecasts that the strongest annual growth will occur in Latin America, where 2011 oil supply will grow by 295,000 b/d to 4.4 million b/d. In the former Soviet Union, output is forecast to climb 175,000 b/d. And China's supply growth is forecast at 125,000 b/d.

Worldwide production of biofuels this year will increase by 190,000 b/d, according to IEA. Ethanol production is estimated to have averaged 475,000 b/d last year in Brazil, where total biofuels output was 516,000 b/d and projected to average 576,000 b/d this year. In the US total biofuel production is forecast to average 928,000 b/d, up from 875,000 b/d last year.

With processing gains unchanged from 2010 at 2.3 million b/d, total non-OPEC oil supply will average 53.4 million b/d this year, according to IEA's figures.

OGJ estimates that in 2011, OPEC crude production will average 29.4 million b/d. With IEA's forecast of average OPEC NGL production at 5.8 million b/d, worldwide supply this year will average 88.6 million b/d. This will result in a 200,000 b/d decline in oil stocks, the same annual change recorded last year.

OPEC's output ceiling, excluding Iraqi production, is about 24.8 million b/d. Although OPEC ministers did not formally change output targets at the organization's Dec. 11, 2010, meeting in Quito, Ecuador, the group must exceed its output allocations by a greater margin in 2011 in order to keep already-high oil prices from surging further and crippling OECD economic recovery.

Following that recent meeting, OPEC said that it would maintain current oil production levels as its market outlook shows that in 2011 oil demand growth is likely to slow from 2010 and because there appears to be ample spare capacity throughout the oil supply chain.

The organization also cited risks to global economic recovery, including possible currency conflicts and fears of a second banking crisis in Europe, factors which would lower oil demand. Also, the OECD still faces lower industrial output, lagging private consumption, and persistently high unemployment, OPEC said.

US economy, energy

Gross domestic product (GDP) in the US this year will continue to recover, growing 2.5%, the same amount in 2010, OGJ estimates.

During 2009, GDP contracted by 2.6% as the economy was dragged down by declines in construction, durable goods manufacturing, and services. Recovery began in the second half of the year.

Economic recovery in 2011 will remain tempered by high unemployment. The latest data show that unemployment in November 2010 reached 9.8%, up from 9.6% a month earlier.

The US Bureau of Labor Statistics (BLS) also reported that in November the number of unemployed persons in the US totaled 15.1 million, and the number of involuntary part-time workers, those employed part-time for economic reasons, was little changed from a year earlier at 9 million. These persons were working part time because their work hours had been cut or because they were unable to find full-time jobs, BLS said.

Following its Dec. 14, 2010, meeting, the Federal Open Market Committee (FOMC) said US economic recovery continues, though at a rate insufficient to ease unemployment.

"Household spending is increasing at a moderate pace but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed," the FOMC said.

OGJ forecasts that US energy demand will grow modestly this year, following a 3.2% jump during 2010. The energy/GDP ratio will decline as the economy grows more than energy demand, resulting in an energy efficiency gain and reversing last year's loss.

Energy required for heating will decline, if the National Oceanic and Atmospheric Administration's Climate Prediction Center's call for above-average temperatures during January, February, and March prove correct.

Colder weather in the first quarter of 2010 boosted heating demand, and the number of cooling-degree days during the summer jumped, further driving natural gas and coal demand for power generation by industrial and electric power consumers.

Energy sources

US energy demand this year will total 98.671 quadrillion btu (quads), up from an estimated 2010 total of 97.685 quads. All of the major energy sources will incur an increase in demand except coal, which will be unchanged from 2010.

Oil demand growth will be limited by efficiency gains in transportation fuels and will grow by a mere 1% this year. In 2010, oil product demand grew by 1.5% in the US, led by distillate. Again this year, distillate will show the biggest percentage gain in oil product demand.

Growth in natural gas demand in the US will slow to 0.2% in 2011 in spite of low prices. Total gas demand will be 24.243 quads. OGJ estimates that gas demand last year grew 4% from a year earlier as a result of a rebound in industrial and electric power use from depressed 2009 levels.

Oil and gas will combine this year to account for 61.4% of the US energy market, down from last year's 61.6% share. Coal's share of the US energy mix this year will decline to 21.3% from 21.5%.

Coal demand will be unchanged from last year at 21 quads following last year's 6.3% surge driven by increased consumption by coke plants and industrial users, including combined-heat-and-power plants, as well as by increased coal use by electric power producers. Retirement of some older coal plants in favor of combined-cycle gas turbines will limit future growth in coal consumption.

Nuclear energy demand this year will rebound to almost 8.4 quads after slipping 0.6% last year to 8.3 quads. Nuclear demand has been little changed since 1998 as the number of operable nuclear units in the US has held at 104.

OGJ forecasts that hydroelectric power and other renewable forms of energy will combine for the largest increase in 2011 US energy demand, jumping 6% from last year to 8.75 quads. With this increase hydropower and other renewable energy forms will represent 8.9% of the energy market, jumping from last year's 8.5%.

US oil supply

Oil production in the US will be unchanged from a year ago, averaging 5.5 million b/d. Output increases in the liquids-rich Eagle Ford shale in South Texas and some other key areas will offset declines in Alaska and elsewhere.

OGJ estimates that crude and condensate production last year in Alaska averaged 595,000 b/d, down from the 2009 average of 945,000 b/d.

Production in 2010 is also estimated to have posted small declines in Oklahoma, Montana, Wyoming, and Colorado. Meanwhile, oil output is estimated to have climbed in Texas, Louisiana, North Dakota, and California.

The state with the biggest output gain was North Dakota, where production from the Bakken shale pushed the statewide average up by 40% from the 2009 level to 305,000 b/d last year. North Dakota is now the fifth-largest oil producing state behind Louisiana, Texas, California, and Alaska.

NGL production will increase this year as the economics of liquids extraction remain attractive compared with natural gas prices. OGJ forecasts that 2011 NGL output will average 2 million b/d. This follows a 3.7% climb in production last year to 1.98 million b/d.

Imports, exports

US imports of crude oil and products will increase, although by small margins.

Crude imports will average 9.15 million b/d this year, up from the 2010 average of 9.14 million b/d. Product imports, which sank 4.8% last year, will move up 1.6% this year to average 2.59 million b/d.

The leading source of US crude and product imports in 2010 was Canada, followed by Mexico, Saudi Arabia, Nigeria, Venezuela, and Russia.

The US will export 1.6% less oil this year, as crude and product exports average 2.15 million b/d. About 98% of these exports will be oil products.

Oil in storage

Partly as a result of limited growth in this year's oil demand, the amount of oil held in storage in the US at the end of 2011 will be unchanged, OGJ forecasts. Crude in storage will total 360 million bbl, and product stocks will finish the year at 745 million bbl.

Additionally, last year's petroleum stocks built from yearend 2009 levels due to an increase in the production of crude and increased refinery activity.

Crude stocks at Cushing, Okla., the designated delivery point for settlement of crude oil futures contracts on the NYMEX, finished 2010 at about 36 million bbl, up from 34.1 million a year earlier and up from the end-2008 level of 27.5 million bbl.

Inventories of products, especially motor gasoline, have remained comfortable since the start of the economic recession at the end of 2007. At yearend 2010, the number of days of supply cover for all of the major petroleum products was well above the average of the previous 5 years.

The volume of crude oil in the Strategic Petroleum Reserve also will hold at 727 million bbl, unchanged since the end of 2009, assuming that no emergencies require withdrawals this year.

Refining

Refinery activity this year will be little changed from 2010, as product imports and demand increase by small percentages. Last year, high crude costs kept refining margins in most areas of the US from rebounding to 2009 levels.

With slightly lower crude and total inputs in 2011 and operable capacity at US refineries averaging 17.6 million b/d, utilization will dip to 85.5% from last year's 85.8%.

Refining capacity shrank in 2010 due to closures and shutdowns, notably those by Sunoco Inc. at Westville, NJ, by Western Refining Inc. at York County, Va., and by ExxonMobil Corp. in Chalmette, La. (OGJ, Dec. 6, 2010, p. 50).

Cash refining margins in the US were better on average last year than during 2009, except for US West Coast refiners, who saw average margins drop by about 10% last year.

As of press time, December margins were unavailable. But through the month of November, the 2010 cash refining margin for US Midwest refiners averaged $8.41/bbl, up from $5.75/bbl for all of 2009, according to Muse, Stancil, & Co.

Also through the first 11 months of last year, US East Coast cash margins averaged $1.67/bbl, compared to 20¢/bbl for all of 2009. And on the US Gulf Coast, the 2010 margin climbed 46% to average $4.41/bbl through November.

The composite refiner acquisition cost of crude climbed in 2010, having dropped in 2009 from a record nominal high of $94.74/bbl in 2008.

Through October of 2010, the latest month for which such data is available from the US Energy Information Administration, the composite refiner acquisition cost of crude averaged $76.12/bbl. For all of 2009, this crude averaged $59.29/bbl.

Oil products

While demand for some major oil products will be unchanged this year from 2010, none will show a decline. Transportation fuels again will be the leader in demand growth in 2011, and distillate fuel oil-as ultra-low sulfur diesel (ULSD), in particular-will record the biggest gain in demand this year, albeit a small one.

OGJ forecasts that distillate demand will average a little more than 3.8 million b/d this year. This is a 1.8% climb from 2010, when demand for distillate increased by 4%. These figures include biodiesel and other renewable diesel fuels that are blended into distillate fuel oil. Compromise tax legislation enacted in December 2010 retroactively renewed a tax credit crucial to biodiesel economics that had lapsed at the end of 2009.

Demand for distillates other than ULSD, primarily those used for space heating and electricity generation, has been waning for some years.

Motor gasoline demand will increase to an average 9.192 million b/d this year last year's 9.1 million b/d and the 2009 average of 9 million b/d. While strong pump prices will keep demand in check, any recovery in US employment will help boost demand.

The average pump price for regular unleaded gasoline in 2010 was about $2.76/gal vs. $2.33/gal a year earlier. In 2008, record crude prices during the summer pushed pump prices to an annual average of $3.23/gal.

Demand for jet fuel will average 1.42 million b/d, up from last year's 1.41 million b/d. Like last year, recovering business and vacation travel will boost jet fuel demand, although airline efficiencies will limit the growth. Last year jet fuel demand registered a 1.2% increase.

This year's demand for residual fuel oil, propane, and other liquefied petroleum gases will be unchanged from 2010. Resid demand will average 500,000 b/d. Mostly used in power generation, the use of resid has been on the decline for decades in favor of cleaner-burning fuels.

LPG demand will hold at 2.055 million b/d this year as a result of flat petrochemical plant demand for feedstocks.

Natural gas market

For this forecast OGJ assumes that 2011 winter weather will be milder across the southern half of the US than it was a year earlier, forcing a decline in gas demand for residential and commercial heating.

The forecast also assumes that the amount of gas in storage at yearend 2011 will be unchanged from storage at the end of 2010.

Demand for US gas including exports this year will be 23.7 tcf, little changed from 2010. Exports, still climbing in an oversupplied market, are forecast to surge 5% to 1.155 tcf, while production and imports decline by small margins.

Last year, even as volumes of gas in storage built, the US exported 2.6% more gas than in 2009. At the same time, US marketed production of gas grew 3%.

Because natural gas prices have been weak amid ample supplies, NGL production is up as producers increasingly target wet gas in shale plays.

OGJ forecasts that gas production in Louisiana this year will decline to 1.9 tcf from last year's 2 tcf. In Texas, gas production will drop 1% following a 3.3% contraction last year, and offshore gas production from the federal Gulf of Mexico will slide to 1.94 tcf from 2.25 tcf, affected by the offshore drilling moratorium imposed after last year's Deepwater Horizon disaster. Although the moratorium has been lifted, permitting at this writing remained stalled.

Weak demand and low prices for gas in the US mean that LNG imports will also dip again this year, as will imports from Canada and Mexico.

OGJ estimates that the average wellhead price of US gas in 2010 was $4.25/Mcf, up from $3.71/Mcf in 2009 but still weak and below not only average prices of the mid-2000s but also below prices needed to spur investment in gas development for the longer term.

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