ECONOMIC GROWTH LIFTS OIL DEMAND PROJECTIONS FOR 1994

Robert J. Beck
Economics
Editor

Economic expansion in the U.S. and recovery in Japan and Europe will fortify second-half 1994 oil demand already stimulated by booming economies elsewhere in the Asia-Pacific region.

Important questions remaining for the oil market are how far demand will slide in the Commonwealth of Independent States and, as always, whether members of the Organization of Petroleum Exporting Countries will produce within their quotas.

The U.S. economy shows no sign of weakness. Growth of the gross domestic product (GDP) this year is projected at 3.1%.

While not high by historic standards for expansion phases of the business cycle, this growth rate is consistent with what many economists believe is the potential for the U.S. economy.

Economic growth and depressed oil prices early in the year lifted U.S. oil demand in the first half and helped raise crude prices at times to more than $20/bbl late in the period.

The U.K. economy is in recovery, and recoveries are expected to start this year in Japan, Germany, France, and Italy, all of which were in recession in 1993. Japan's GDP declined by 0.5% last year. European members of the Organization for Economic Cooperation and Development (OECD) posted a combined GDP decline of 0.2%.

This year, GDPs are expected to grow by 0.5% in Japan and 1.5% in the European OECD.

These economic turns should lift petroleum demand in the second half, although the International Energy Agency (IEA) projects little change for petroleum consumption in the region for all of 1994.

Petroleum demand in the C.I.S. fell sharply last year, and the IEA is projecting another sharp decline in 1994. This will be partially offset by increased consumption in other non-OECD areas, particularly in the Asia-Pacific region.

The International Monetary Fund estimated that economic activity in the C.I.S. fell 13.7% in 1993 and will decline another 2.4% this year. In contrast, economic output in non-OECD Asia increased 8.7% last year and will move up 7.1% this year. Relatively low oil prices should help economic activity.

OPEC'S CHALLENGE

OPEC's challenge of balancing worldwide oil supply and demand at an acceptable price will continue to be complicated by rising oil production capacity inside and outside the group. OPEC agreed in June to keep its quota at 24.52 million b/d through the rest of the year. This is below projections for demand for OPEC crude in the fourth quarter.

If demand reaches expected levels, the market will tighten and prices will rise. Countries with significant idle production capacity--mainly Kuwait, United Arab Emirates, and Saudi Arabia--will face growing temptations to produce at rates that exceed their OPEC limits.

And Iraqi production, negligible now due to United Nations trade sanctions, still looms as a potential source of supply.

U.S. production of crude oil continues to decline; imports, therefore, rise. Drilling increased modestly in the first half, but not by nearly enough to slow the production slide. Most of the drilling boost came from rising demand and prices for natural gas.

The U.S. rig count averaged 745 in the first half, up 9% from first half 1993 but down from the average of 757 for all of last year. The rig count set a record low of 717 for all of 1992.

The weekly U.S. rig count was 761 as of June 24, compared with 702 a year earlier.

International drilling activity has also been sluggish. In May this year the international rig count, excluding the U.S. and Canada, was 737, compared with 785 last year.

Some drilling recovery is possible in the second half . If oil demand rises as expected in the U.S. and worldwide, and if OPEC sticks to its quota, continued gains in the price of crude are possible, enabling oil and gas companies to spend the money they have budgeted for exploration and drilling.

HIGHLIGHTS

Here are U.S. highlights of OGJ's midyear forecast for 1994.

• Demand for petroleum products will rise 2.9% from 1993's level to an average of 17.73 million b/d. The percentage gain compares with the 1.5% that OGJ forecast at the beginning of the year (OGJ, Jan. 31, p. 53).

• Demand for motor gasoline will be up 1.1%--also a higher growth rate than OGJ projected in January. During the first half demand was up an estimated 1.8% from the same period a year earlier.

• Distillate demand will move up 3.9% in 1994 to average 3.16 million b/d.

• Crude and condensate production will slide 2.7% in 1994, slightly more than what was projected in January. Estimated output during the first half fell 2.9% from the first half of 1993. Alaskan production was down 1.5%, Lower 48 output down 3.3%.

• Total imports will rise in 1994, pushing dependency on imported oil to a record high 51.2% of domestic demand from 4-9.9% in 1993. The previous record high dependency rate was 47.7% in 1977.

• Refinery runs will move up 0.5% in 1994 due to the higher product demand. The refinery utilization rate will increase to 92.4% for the year from 91.5% for 1993, partly as a result of another drop in operable refining capacity.

• Average crude oil prices will be lower for all of 1994 than they were in 1993 due to the depressed levels of most of the first half.

• Stocks will fluctuate seasonally but end the year at close to yearend 1993 levels: 335 million bbl of crude and 725 million bbl of products.

U.S. DEMAND SUMMARY

This year's expected gain in U.S. demand for petroleum products will be the third annual increase in a row.

It depends on continuation of steady economic expansion.

First half 1994 demand is estimated at 17.6 million b/d, up 4.1% from the first half a year ago. Demand for the second half is expected to move up to 17.86 million b/d from 17.566 million b/d in the same period of 1993.

Estimated first half demand exceeded OGJ's early-year forecast for the period by 195,000 b/d.

Total demand, which includes exports of crude oil and products, is projected to increase 2.4% in 1994 to 18.68 million b/d. Exports are expected to fall this year by 5.3% to 950, 000 b/d. Exports during the first half of 1994 were down 9.8% at an estimated 930,000 b/d.

Demand is projected to increase in all major product groups. One product, naphtha jet fuel, is disappearing from the mix as the military shifts to kerosine fuel for its aircraft. The gain expected for motor gasoline demand reflects growth of the vehicle fleet and an increase in miles driven per vehicle, both results of a growing economy. Partly offsetting those trends are continued but slower improvement in vehicle fuel efficiency.

Average motor gasoline pump prices are expected to remain close to 1993 levels, possibly lower. This, too, will encourage travel and gasoline consumption.

Economic growth is the key reason for the expected increase in distillate demand. Demand for residual fuel oil will rise because of the product's favorable pricing in relation to competing fuels.

U.S. SUPPLY SUMMARY

U.S. crude oil and condensate production will fall to an average 6.95 million b/d this year.

Alaskan output, which started to slide in 1989, will be down only 0.8% this year at 1.57 million b/d. Lower 48 output is expected to fall 3.3% to 5.09 million b/d.

The drop in total U.S. output forecast for 1994 follows a 4.5% decline in 1993 and a 3.3% decrease in 1992. Production in 1994 will be the lowest since that of 1954.

With demand rising and production falling, imports must increase. They'll reach a high of 9.57 million b/d in the third quarter this year.

Industry stocks were replenished in 1993 after falling close to minimal operating levels the previous year.

Product stocks fell to 699 million bbl at yearend 1992, just above the minimum operating level of 671 million bbl. For some products, inventory levels were close to shortage levels.

Refinery crude runs this year are expected to average 13.89 million b/d. Average refining capacity will be down 0.7% at 15.05 million b/d.

The result will be a peak in refinery capacity utilization of 93.9% in the third quarter. This is close to full capacity for the industry. Some spare capacity is required for maintenance shutdowns.

PRICES

Crude oil prices started this year considerably lower than they were at the beginning of 1993.

They fell in the second half of 1993, in part due to sluggish demand growth in Europe and Japan. Price weakness carried over into 1994 as refiners reduced stocks to meet some of the winter demand.

Crude prices strengthened in this year's second quarter as stocking activity reversed: Instead of drawing down inventories as they had in the first quarter, refiners began to take advantage of low prices and restock.

The price of world export crude oil averaged only $13.32/bbl for the first quarter of this year vs. $16.92/bbl for the same period in 1993.

The average futures price for light sweet crude on the New York Mercantile Exchange (Nymex) averaged $14.84/bbl, compared with $19.84/bbl in first quarter 1993.

By the third week in June, however, the world export crude price had climbed to $16.24/bbl, 5 cents/bbl more than its level at the same time in 1993. The Nymex futures price for light sweet crude reached $19.64/bbl the same week vs. $18.74/bbl a year earlier.

As a result of the weak first quarter, crude oil prices for the first half of 1994 averaged 16% below their levels of a year earlier. The worldwide export price in the first half averaged $14.23/bbl, compared with $16.95/bbl for first half 1993. The futures price of light sweet crude in the first half was 18% below its year earlier level at $16.20[bbl.

With demand up in the U.S. and recovery expected in Europe and Japan, this year's second half looks much better for crude prices than its predecessor did.

OPEC AND PRICES

The price for the OPEC basket of crude oils averaged an estimated $14.71/bbl for the first half of 1994, down from $17.96/bbl for the same period in 1993.

Pressure on OPEC members not now producing at capacity to bust their quotas will rise in step with crude oil prices in the second half. And significant quota cheating would weaken prices in a market that otherwise would be tightening.

OPEC's biggest producer, Saudi Arabia, appears dedicated to its quota of 8 million b/d, although it is completing a capacity build this year to 10 million b/d. And prospects seem to have dimmed for a restart of exports from Iraq.

According to IEA, demand for OPEC crude averaged 24.8 million b/d during the first quarter this year and dropped to an estimated 24. million b/d in the second quarter.

OGJ estimates that demand for OPEC crude will move up to 24.5-25 million b/d in the third quarter, depending on changes in the level of stocks.

IEA estimated OPEC output during April and May at an average of 24.8 million b/d. This output level is slightly above the quota and substantially above the estimated second quarter demand for OPEC oil. Additions to stocks have helped to balance the market in the second quarter.

If demand for OPEC crude grows as expected in the second half, the apparent overproduction won't hurt prices as much as it has at times in the past.

As long as Iraq remains out of the market, stock management and demand factors such as performance of worldwide economies will have more influence on prices than will anything likely to occur within OPEC.

U.S. PRICES

The U.S. wellhead price of crude oil averaged $10.51/bbl for January this year--down 28% from $14.64/bbl in January a year earlier. That is the latest official figure available for 1994.

Last year the wellhead price started sliding in May and continued to fall through the remainder of the year, dropping to $10.38/bbl in December.

The average posted price for West Texas Intermediate crude fell during the first quarter this year then rebounded in the second quarter. The WTI price averaged $15.33/bbl for the first 6 months this year, down 17% from the same period of 1993.

The U.S. wellhead price closely tracks the world export, WTI, and futures market prices. This year's movements followed an unusual pattern, sliding throughout the first quarter of the year then moving up in the second quarter.

With the market expected to remain strong through the second half, OGJ projects an average U.S. wellhead price for all of 1994 of $13/bbl vs. $14.23/bbl in 1993.

U.S. product prices did not fluctuate as much as crude prices did in the first half.

The OGJ survey of self-service unleaded motor gasoline pump prices shows the average price for the first half of 1994 at $1.061/gal, down 4.8% from $1.115/gal last year.

The decline in the pump price has come in spite of an increase in the motor gasoline tax. The average motor gasoline price excluding all federal, state, and local taxes was down 14.2% in the first half from the level a year earlier.

As with crude oil, product prices were firming at the end of the first half. Gasoline prices were moving up due to increased demand and higher feedstock costs. The pump price at the end of June was $1.125/gal vs. $1.127/gal a year earlier.

State and federal gasoline taxes averaged 37.2 cents/gal in this year's first half vs. 34.1 cents/gal in 1993.

The price rise is not expected to dampen demand during the second half. Gasoline prices are still at bargain levels. With refineries operating at near capacity rates and demand rising, however, that might change. Refining accidents or maintenance problems can tighten the market quickly and lead to price spikes when little surplus capacity exists.

OGJ expects the pump price for all types of motor gasoline, including premium grades, to average $1.15/gal for 1994 vs. $1.173/gal for 1993. This reflects low prices early in the year.

The pump price will not come close to the record high average annual price for all grades of motor gasoline, set in 1981 at $1.353/gal.

Residential heating oil prices for the first 3 months of 1994 averaged 91.3 cents/gal, compared with 94.8 cents/gal in the first quarter of 1993. The decline was mainly due to reduced feedstock costs, partially offset by stronger demand in the first quarter.

OGJ expects heating oil prices to average 90 cents/gal for the year vs. 91.1 cents/gal last year. However, stronger distillate heating oil demand due to unusually cold weather or more robust economic growth could push prices higher.

NATURAL GAS PRICES

Natural gas prices are expected to be up again this year following a sharp rise in 1993.

Strong demand held gas prices above year-earlier levels for most of the first half, although they were at near parity at midyear.

OGJ projects an average U.S. wellhead gas price of $2.15/Mcf for 1994, compared with $2.01/Mcf in 1993. This is based on an expected 2.4% increase in U.S. natural gas consumption. This year's expected 7% gas price hike will follow a jump of 15.5% last year.

The first half 1994 average for gas futures prices was $2.14/MMBTU vs. $2/MMBTU last year. For the week of June 24, the price was $2.07/MMBTU, vs. $2.10/MMBTU a year earlier.

Gas prices peaked in 1984 at $2.66/Mcf, then dropped as demand weakened to $1.67/Mcf in 1987. The average annual price was relatively constant the next several years, increasing to $1.71/Mcf in 1990 but falling to $1.64/Mcf in 1991. The price then moved up in 1992 to $1.74/Mcf.

Even during the years with relatively constant prices there have been pronounced swings related to seasonal changes in demand. The seasonal fluctuations are expected to continue but be somewhat dampened by increased industrial and utility demand not related to heating requirements.

THE U.S. ECONOMY

OGJ expects the U.S. economy to continue its expansion in 1994.

Low inflation and interest rates are expected to boost investment. And increases in industrial production, auto sales, and housing starts are expected to bolster economic growth.

Preliminary figures indicate that the U.S. economy was expanding at a 3.4% annual rate during the first quarter of the year. The 3.1% GDP growth that OGJ expects this year follows 3% growth last year.

Late in 1990 the U.S. economy went into its first economic recession since 1982. Since then the economy has been struggling to recover the robust growth of the 1980s.

The economy enjoyed 8 consecutive years of economic growth before the latest recession, a record period for sustained growth. GDP increased 29.9% during 1982-90, an average rate of growth of 3.3%/year.

This year industrial production is expected to increase an estimated 4.1% following an increase of 3.5% in 1993. New car sales are expected to move up to 9 million in 1994 from 8.7 million in 1993. New car sales totaled 9.9 million in 1989 and 9.5 million in 1990.

Housing starts are projected to move up to 1.4 million from 1.3 million in 1993.

ENERGY DEMAND

The increase in economic activity will make energy consumption jump by 2.5% this year, compared with a 2% increase in 1993.

Energy consumption, which declined in the early 1980s, moved up 14.7% during the 1982-90 expansion. That was a average growth of 1.7%/year, about half the growth rate of GDP.

When the economy weakened, energy consumption slipped by 0.1% in 1990 and 0.2% in 1991. In 1992 energy demand moved up 1.3% as the recovery gathered momentum.

Since 1970 growth in energy consumption has been slower than GDP growth, showing an improvement in the level of economic output relative to energy input. The rate of growth in energy consumption tends to track closer to GDP growth during periods of rapid economic expansion and during periods of low energy costs.

Energy consumption per unit of GDP, falling since 1970, was 30% lower in 1993 than in 1970. Energy consumption per unit of GDP fell from 23,300 BTU/$ in 1970 to 16,300 BTU/$ in 1992. The OGJ projection is for energy consumption per unit of GDP to continue to decline, dropping to 16,200 BTU/$ in 1994.

In spite of the improvement in efficiency, total energy consumption is expected to increase along with economic activity in 1993. Energy consumption is projected to move up 2.5% to 85.85 quadrillion BTU (quads) for 1994.

Oil energy demand is expected to move up 2.9% in 1994 to 34.76 quads. Energy from oil increased only 0.7% in 1993. Low oil prices have helped to stimulate demand this year.

Oil's share of total energy demand will increase to 40.5% from 40.3% last year. It was 40.8% in 1992. In 1978, the year of peak U.S. oil consumption, the market share was 48.6%.

Demand for energy from natural gas will also increase in 1994 but at a slightly lower rate--2.4% to 21.29 quads. This follows a 3.2% increase last year. The natural gas market share will remain at 24.8% in 1994. The share in 1992 was 24.5%.

Together oil and natural gas will provide 65.3% of the energy consumed in 1994, compared with 65.1% in 1993 and 65.3% in 1992.

Increased electrical power consumption will help boost demand for energy from coal, which will increase 1.1% in 1994 to 19.65 quads. This follows an increase of 3% in 1993. Coal's market share will slip to 22.9% in 1994 from 23.2% last year.

Increased rain and snowfall over the past year will help boost energy output from hydroelectric and other sources by 4.1% in 1994 to 3.39 quads. This follows an 8.1% increase last year. The market share will remain at 3.9% in 1994 but is up from 3.7% in 1992.

Hydro power output had been well below capacity for several years because of drought conditions in the western U.S. Conditions have improved, but hydro plants are still recovering. Other energy sources, such as geothermal, wind, wood, and solar, provided only 0.2% of total energy consumed in the U.S. in 1993.

Nuclear energy output is expected to increase 3.7% this year to 6.76 quads. This follows a decline of 1.4% last year. Nuclear's market share is expected to increase to 7.9% in 1994 from 7.8% in 1993. It was 8% in 1992.

In recent years nuclear energy output has been moving up gradually, mainly due to an increase in capacity utilization. No new nuclear units are being added, and total capacity has started to decline. Expectations are for only modest growth in nuclear energy output in future years.

This slowing of growth in nuclear power generation will force the electric power industry to turn to other fuel sources in the future, probably coal and natural gas.

NATURAL GAS

Consumption of natural gas is expected to increase 2.4% in 1994 to 20.66 tcf. This follows increases of 3.2% in 1993, 2.7% in 1992, and 1.7% in 1991.

Consumption of gas has risen by 24.4% since 1986, when it totaled a recent low 16.221 tcf. The record high for gas consumption was 22.049 tcf in 1972. Demand slipped sharply when gas prices rose in the late 1970s and early 1980s.

Depressed prices helped boost gas demand during the recent recovery. During 1987-91, gas prices averaged $1.68/Mcf, well below the peak of $2.66/Mcf in 1984. Prices at these levels helped gas compete with fuel oil and coal.

The increase in prices over the past few years has reduced gas demand to some degree. Utilities and industrial facilities with multifuel capability may move away from natural gas if the price moves up much faster than those of competing fuels.

Of the total gas consumption increase during 1986-93, the industrial sector accounted for 56.6%. Industrial demand moved up from 5.579 tcf in 1986 to 7.819 tcf last year.

Demand also moved up in other major economic sectors. Over that same period commercial demand increased 25.5% to 2.908 tcf in 1993. Residential demand moved up 14.9% to 4.956 tcf, and utility demand was up 3.1% to 2.682 tcf. Utility demand has fallen in response to the increase in gas prices by 3.8% over the past 2 years. Consumption of gas as a pipeline and lease plant fuel increased 28.6% to 1.811 tcf.

Last year the largest increases in consumption were posted by the industrial and residential sectors. Industrial demand moved up 3.9%, an increase of 292 bcf, and residential demand moved up 5.7%, an increase of 266 bcf.

The same pattern is expected in 1994, with residential, commercial, and industrial demand rising and utility demand slipping. Housing construction and conversions are expected to boost residential consumption. Commercial and industrial sector demand will be stimulated by increased economic activity.

In the utility sector gas will continue to face stiff price competition from coal. According to the Energy Information Administration (EIA), the cost of coal for steam electric utilities dropped from $1.455/MMBTU in 1990 to $1.385/MMBTU in 1993. The cost of natural gas for these utilities was $2.321/MMBTU in 1990, $2.153/MMBTU in 1991, and $2.56/MMBTU in 1993.

In addition to the competition from coal, increased hydroelectric output may reduce the need for electric power from other generating facilities and further lower the demand for natural gas.

Gas has an advantage with costs associated with environmental regulations. And natural gas is the main fuel for small additions to generating capacity.

U.S. marketed production of natural gas is expected to increase by 1.3% in 1994 to 19.49 tcf. This follows an increase of 2.8% in 1993 to 19.24 tcf.

U.S. gas production has risen in response to growing demand and the increase in prices. Domestic output hit a peak of 22.648 tcf in 1972 but slipped to a recent low of 16.859 tcf in 1986.

Gas imports have filled much of the recent gains in demand. Imports, mainly from Canada, moved up from 750 bcf in 1986 to 2.277 tcf last year.

Imports of natural gas will increase in 1994 to 2.435 tcf.

Imports from Canada are projected to move up 5.7% in 1994 to 2.32 tcf. Canadian imports were up 4.8% last year at 2.194 tcf. Imports of LNG, primarily from Algeria, will increase to 115 bcf in 1994 from 83 bcf in 1993.

PETROLEUM DEMAND

Rising economic activity was a strong reason for the surge in petroleum production consumption in the first half. But it wasn't the only one.

Slightly colder weather, particularly in January, also contributed. Heating degree days in January were up 21.4% from the year earlier and were 6.3% above normal. For the first 4 months of 1994, heating degree days were up a modest 0.8% from the same period in 1993.

Both of these factors were reflected in demand for distillate, which moved up 7.3% to average 3.31 million b/d for the first half.

Oil demand rose in 1992 and 1993 after falling in the previous 2 years.

During the past 15 years, U.S. demand for petroleum has been influenced by competing trends: economic expansion, which boosts consumption, offset by improvements in energy efficiency and conservation.

Oil demand hit an all time high of 18.847 million b/d in 1978, then plummeted to 15.231 million b/d in 1983 due to rising product prices. The long recovery through 1990 helped boost petroleum demand during the next 6 years.

Motor gasoline demand was up 1.8% during the first half this year, averaging 7.44 million b/d. The improvement in the economy has boosted demand by increasing personal income and reducing the need for conservation in personal and business driving. Relatively steady pump prices during the first half, on average 4.8% lower than a year earlier but about even at midyear, boosted demand in a trend expected to continue into the second half.

PRODUCT DEMAND

For the year, motor gasoline demand is projected to average 7.56 million b/d, up 1.1% from 1993. This will be a record high, the third straight year of rising demand following 3 years of declines.

The previous peak year for motor gasoline demand was 1978, when demand averaged 7.412 million b/d. Improvements in auto efficiency reduced demand after that.

The size of the vehicle fleet is increasing along with the population. And the miles driven per vehicle is closely related to economic conditions and discretionary incomes of drivers.

Also, the rate of improvement in average vehicle fuel efficiency has been declining in recent years. EIA says average miles driven per gallon of gasoline used declined in 1992 for the first time since 1973. The average fell to 21.6 mpg in 1992 from 21.69 mpg the year before. In 1973 the average was 13.3 mpg.

Distillate fuel oil demand during the first half this year was up 7.3% from the same period in 1993 as economic growth boosted demand for highway diesel fuel due to increased business shipments. Cold weather in January helped boost heating oil demand.

The distillate demand increases projected by OGJ will come in all economic sectors: residential and commercial; transportation; and industrial, farm, and utility.

Demand for residual fuel oil moved up 7.3% in the first half from the same period a year earlier, averaging 1.11 million b/d. Low crude oil and product prices and high natural gas prices helped improve the competitive position of resid.

During the early part of the year heavy fuel oil prices were down significantly from their level a year earlier. According to EIA, the resid wholesale price for January averaged 28.7 cents/gal, down 8% from the same month in 1993.

With resid prices low relative to competing fuels, electric utility consumption of oil products moved up sharply in early 1994. Consumption in this category, mainly of resid, for the first 2 months of 1994 was up 73% from the same period of 1993.

For the year resid demand is projected at 1.16 million b/d, up 7.4% from 1993 consumption. Resid demand during the second half of the year is projected at 1.21 million b/d, up 7.5% from the same period of 1993.

Demand for LPG and ethane will average 1.8 million b/d in 1994, up 3.8% from 1993. Demand during the first half was up 7.1% at 1.83 million b/d. Chemical demand is up along with increased residential/commercial demand associated with the return to normal weather.

Demand for all of the other petroleum products is also expected to increase this year--by 4.2% to 2.54 million b/d. Demand during the first half of 1994 averaged 2.437 million b/d, up 3.9% from 1993. Boosts will come from economic expansion, increased construction, and rising spending on highways. Included in this product category are petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt and road oil, still gas, and miscellaneous products.

SUPPLY

U.S. production of crude oil and lease condensate averaged 6.7 million b/d in the first half, down 2.9% from the same period of 1993.

In past years periodic fluctuations in Alaskan output have partially masked the decline rate in U.S. crude production. But Alaskan North Slope flow now is falling steadily.

During the first half, Alaskan output averaged 1.575 million b/d vs. 1.599 million b/d in the first half of 1993 and 1.751 million b/d in first half 1992. 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 fell 3.3% for the first half to 5.125 million b/d. Lower 48 crude and condensate production fell from 9.01 million b/d in 1973 to 5.265 million b/d in 1993.

The decline rate is expected to slow slightly in the second half of this year. Steady crude oil prices could result in investment in secondary recovery projects, workovers, and other methods of sustaining flow. OGJ is projecting second half output of 6.62 million b/d. Crude output will average 6.66 million b/d for the year, down 2.7%.

Alaskan output is expected to be down slightly, averaging 1.565 million b/d for the second half. The summer is usually a period for maintenance projects in Alaska, which reduce production.

Total U.S. crude and condensate output this year will be at the lowest level since 1954 and will be down 25.8% from the recent high of 8.971 million b/d in 1985.

The possibility of increased drilling in the second half coupled with new efficiencies available from technological advances may work to slow the production decline. But with drilling still near record lows, production improvements sufficient to reverse the decline, regardless of new technology, are unlikely.

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 before North Slope flow began. Increases in Alaska and a boom in Lower 48 drilling activity pushed production up to 8.971 million b/d in 1985. But output has been sliding since 1986 due to a slump in prices and drilling activity and the more recent decline in North Slope production.

Production of natural gas liquids and other hydrocarbon liquids averaged 1.95 million b/d for the first half of 1994, down 4% from the year before. Production of NGL and other liquids is projected to average 1.97 million b/d for the year, down 1% from 1993. Starting in 1993, this production category includes oxygenates such as methyl tertiary butyl ether and fuel ethanol.

The decline in total liquids production is not as pronounced as the fall in crude output. U.S. total liquids production is projected to average 8.63 million b/d for 1994, a decline of 2.3% from the year before. But total liquids production is still down 18.9% from the recent high of 10.636 million b/d in 1985.

REFINING

All of the year's expected decline in U.S. refining capacity occurred during the first half. Demand strength is expected to hold capacity at 15.05 million b/d for the rest of the year.

Yet even though demand was rising last year, capacity fell significantly to an average of 15.143 million b/d.

This was a shift from the pattern of 1984-92, when capacity fluctuated within a range of about 15.5-15.9 million b/d while product demand increased.

U.S. refining capacity peaked at 18.8 million b/d in 1981.

In recent years as product demand has increased, input to refineries has moved up. The increased input coupled with relatively constant capacity has boosted the capacity utilization rate.

The utilization rate dipped below 70% in 1981 and 1982 but climbed to 91.5% last year.

Crude input to refineries is projected to be up 0.5% this year at 13.68 million b/d, and total input to distillation units will move up 0.4% to 13.9 million b/d. The increased input coupled with the expected slide in capacity will push the utilization rate up to 92.4% for 1994.

A 1992 study by the consulting firm Wright Killen concluded that an additional 1.5 million b/d of capacity could be shut in due to the costs of new environmental regulations. Some of the shutdowns may be occurring now. If that projected volume of capacity is shut down, the U.S. will no longer have sufficient domestic refining capacity to meet future petroleum demand.

If petroleum product demand continues to move up along with economic growth, refining capacity needs to be added or the U.S. will have to substantially increase imports of petroleum products.

IMPORTS

Imports are expected to move up sharply this year to fill the widening gap between declining domestic production and increasing consumption of petroleum products. This is the third consecutive year of increase following 2 years of declining imports associated with the economic recession.

For the first half total, industry imports, excluding crude imports for the Strategic Petroleum Reserve (SPR), were up 2.4% at 8.61 million b/d. Industry imports are expected to be substantially higher in the latter half of the year. Increased product demand, lower domestic liquids production, and a need to replenish stocks will necessitate the imports surge.

Imports are projected to average 9.55 million b/d during the second half of 1994.

For the year total imports are forecast at a record high 9.08 million b/d, up 5.6% from 8.597 million b/d last year. Imports in 1993 were up 9.3% from the previous year.

The previous peak year for industry imports was 1977, when they averaged 8.786 million b/d. Industry imports dipped to a recent low of 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 run-up in crude prices. Imports moved back up to 8.061 million b/d in 1989 but retreated for 2 years due to weak petroleum demand related to the economic slowdown.

Crude imports, excluding the SPR, are projected to increase 3.7% in 1994 to 7.02 million b/d. Crude imports increased 11.5% last year. During the first half of this year crude oil imports averaged 6.65 million b/d, up only 0.1% from first half 1993. But during the first half of the year stocks were reduced significantly to meet the surge in demand. It is anticipated that these stocks will be rebuilt in the second half of the year.

Crude imports for the SPR were resumed in June 1992 and averaged 10,000 b/d for the year. Before then there had not been any SPR imports since August 1990. SPR imports averaged 15,000 b/d in 1993. Starting in 1992 some of the additions to the SPR were from U.S. producers.

OGJ projects that the SPR fill rate will remain at close to the 1993 level of 34,000 b/d and that imports for the SPR will again average 15,000 b/d in 1994.

Petroleum product imports will jump in 1994 due to the lack of spare U.S. refining capacity. Product imports are projected at 2.17 million b/d for the year, up 14.9% from 1993. During the first half product imports averaged 1.96 million b/d, up 11% from the same period of 1993. Increased product demand in the second half of 1994 and the need to replenish product stocks are expected to boost second half product imports to 2.16 million b/d, up 13.7% from the second half of 1993. Tight refining capacity will also contribute to the increase as refiners boost product imports to keep a buffer supply against the chance of unusually cold weather. With little excess capacity at U.S. refineries, future increases in product demand will have to be met by increased product imports.

The leading source of crude imports during the first quarter of this year was Saudi Arabia, which supplied 1.086 million b/d, 17.5% of the total. Crude imports from Saudi Arabia averaged 1.282 million b/d for all of last year. They were as low as 131,000 b/d in 1985. Other countries supplying large volumes of crude to the U.S. during the first quarter were Mexico 963,000 b/d, Canada 961,000 b/d, and Venezuela 920,000 b/d.

Total crude imports from OPEC members averaged 3.05 million b/d for the first quarter, 49.1% of total crude imports. Crude imports from OPEC averaged 3.609 million b/d during all of 1993. Crude imports from OPEC were only 41% of the total in 1985, averaging 1.312 million b/d.

First quarter product imports averaged 2.085 million b/d. Product imports averaged 1.833 million b/d for 1993. Canada was the leading source of non-U.S. products at 346,000 b/d.

Product imports from Virgin Island refineries averaged 316,000 b/d, and imports from Venezuela averaged 283,000 b/d. Product imports from OPEC averaged 682,000 b/d, about 33% of total product imports.

Total imports from OPEC during the first quarter of this year averaged 3.732 million b/d. This was 45% of total U.S. imports in the first quarter vs. 49.6% for all of 1993.

STOCKS

Last year crude and product stocks rose after falling close to minimum operating levels the year before. At yearend 1993, stock levels were more consistent with the increased level of product demand and the need for a stock buffer in case of seasonal demand fluctuations.

During the first half of this year about 230,000 b/d of supply came from stocks. Uncertainty about future crude prices will encourage refiners to add to crude stocks before the heating season.

The expected yearend crude stock level of 335 million bbl level is close to the level that allows refiners flexibility to meet changing product demand patterns. Product stocks are also expected to be increased in the second half and return to a level close to yearend 1993, 725 million bbl.

Industry stocks plummeted in 1992 and ended the year at a total of 1.017 million bbl. This left the industry vulnerable to an unexpected surge in product demand. Industry stocks moved up in 1993 and finished the year at a level more consistent with demand and minimum operating requirements.

EIA has listed 320 million bbl as the minimum operating level for crude stocks. At end 1992 the industry had run crude stocks dangerously low, ending the year at 318 million bbl.

At the end of the first half of this year product stocks totaled an estimated 690 million bbl. The minimum operating level for product stocks is about 670 million bbl. But the minimum level for individual products varies and depends on the season.

In the past, refiners have generally been more willing to deplete product stocks than crude stocks. Crude stocks give refiners the flexibility to meet a surge in demand for any product. However, with refineries operating at close to capacity rates, companies may have difficulty stepping up through-put to meet demand surges. Additional product stocks will be necessary.

At yearend 1992, total industry stocks represented only 59.7 days of supply at then-current demand. This moves up to 61.5 days of supply at yearend 1993. With no change in yearend stock levels and increased demand, yearend stocks in 1994 will represent only 59.8 days of supply.

Since resuming in June 1992, imports for the SPR have been sporadic. The fill rate, including both imports and purchases from U.S. producers, averaged 17,000 b/d in 1992 and 34,000 b/d last year. At midyear, the SPR held an estimated 593 million bbl of crude. It will hold a projected 600 million bbl at yearend.

INTERNATIONAL OUTLOOK

World oil prices slumped during the last half of 1993 and remained depressed through the first 4 months of 1994.

Sluggish demand in several industrial countries and rapidly falling demand in the C.I.S. were major factors. At the same time, non-OPEC production rose, particularly in the North Sea, and during the fourth quarter of 1993 and first quarter this year significant supplies came out of stocks.

Demand for OPEC oil during the first quarter of this year was down 300,000 b/d from the same period a year earlier. The manipulation of stocks played a significant role in the movement of world crude prices during the past year. The reduction in stocks weakened prices late last year and early this year. And although little official data is available for the second quarter the recent strength in oil prices is probably attributable to some degree to additions to stocks over the last couple of months. U.S. industry stocks have increased about 29 million bbl since the end of March.

IEA reported that stocks held by OECD members as of the end of the first quarter of 1994 were down significantly from the level at yearend 1993. Total OECD stocks on land as of the end of the first quarter totaled 3.365 billion bbl, down 88 million bbl from the end of last year. Company held stocks were down 103 million bbl at 2.265 billion bbl. Industry stocks represented 64 days of forward consumption at the end of the first quarter. This was down from 67 days a year earlier. Industry stocks have ranged from 65 to 70 days of forward consumption for the past 8 years.

OPEC production capacity has moved up to the point where the group again has the capability of offering substantial excess crude oil to the market and depressing prices. Estimated current OPEC capacity is 27-28 million b/d. Based on IEA estimates the demand for OPEC oil during the second and third quarters of this year will average about 25 million b/d.

Over the past several years OPEC has been assisted by the slide in C.I.S. output. However, the decline in output has been partially offset by a sharp drop in domestic demand in the C.I.S., which has buoyed exports from the region. During 1990-93, C.I.S. liquids production has fallen by 3.7 million b/d. Over the same period consumption in the C.I.S. has fallen by 2.9 million b/d.

CURRENT MARKET

According to IEA, OPEC crude oil production averaged 24.82 million b/d in the first 5 months of this year, about 300,000 b/d over the group quota. IEA estimates that total worldwide demand averaged 67.45 million b/d during the first half of 1994, up from 66.9 million b/d for the same period a year earlier. The U.S. led an increase in OECD consumption. And there were significant increases in demand in China, Asia, the Middle East, and Latin America. Those increases more than offset the 1 million b/d drop in C.I.S. consumption.

Estimated total worldwide oil supply in the first half, before stock changes, averaged 67.45 million b/d, up from 67.3 million b/d for first half 1993. OPEC total liquids output averaged 26.8 million b/d, compared with 26.85 million b/d over the same period of 1993. Non-OPEC supply moved up to 40.65 million b/d from 40.4 million b/d in first half 1993.

The increase in non-OPEC output came in spite of an estimated 1.15 million b/d drop in C.I.S. production. Output from OECD-Europe, mainly the North Sea, increased by more than 1 million b/d in first half 1994.

Stocks were reduced at a rate of 1 million b/d during the first quarter of the year, reducing the demand for OPEC oil. But an offsetting stock build is estimated to have occurred in the second quarter as refiners took advantage of depressed crude prices to boost inventories.

OUTLOOK

For the rest of the year, much depends on actions of OPEC members with spare production capacity as demand builds in the Northern Hemisphere winter.

And underlying seasonal consumption swings are whatever demand gains result from the trend toward economic recovery in the major consuming regions. Those gains could be significant. Extent of the slide in C.I.S. demand may also be a factor.

Stock management will be important. A stock build would boost demand for OPEC oil during the second half of the year.

For all of 1994, IEA projects a 700,000 b/d increase in worldwide demand for petroleum products to an average of 67.9 million b/d.

This includes a projected 500,000 b/d increase in North American demand and an 800,000 b/d drop in C.I.S. demand. Demand in Western Europe is expected to remain at 13.7 million b/d. The largest increase in the developing countries will be in Asia, where demand is projected to move up 300,000 b/d. Demand in China and the Middle East is projected to be up 200,000 b/d.

IEA projects a 300,000 b/d increase in non-OPEC supply to 40.8 million b/d in 1994. This means another 400,000 b/d of supply will have to come from stocks or from OPEC output. If stock levels don't change in 1994, demand for OPEC crude oil and NGL will average 27.1 million b/d. This is up only 100,000 b/d from the estimated 27 million b/d for OPEC liquids output in 1993.

If there are net additions to stocks in 1994, demand for OPEC oil will be higher. And if stocks decline, demand for OPEC oil will fall. According to IEA, there was a net addition in worldwide stocks of 300,000 b/d last year. Demand for OPEC total liquids is expected to increase to 26.9 million b/d in the third quarter and 27.5 million b/d in the fourth quarter. OPEC NGL output is estimated at a constant 2.3 million b/d for the year.

Therefore, demand for OPEC crude will move up to 24.6 million b/d in the third quarter and to 25.2 million b/d in the fourth quarter.

While these levels exceed the OPEC quota, they are well within available OPEC production capacity.

Copyright 1994 Oil & Gas Journal. All Rights Reserved.