OIL DEMAND CONTINUES TO GROW IN THE U.S. AND WORLDWIDE

July 31, 1995
Bob Tippee Managing Editor-Economics and Exploration Robert J. Beck Associate Managing Editor-Economics Rising oil consumption is challenging the Organization of Petroleum Exporting Countries production quota-but not the group's ability to meet demand. In the second half of 1995, the oil market will continue to need more oil from OPEC members than the group claims to be willing to produce with its quota at 24.52 million b/d. If the quota really limited supply, ingredients would be in place

Bob Tippee
Managing Editor-Economics and Exploration
Robert J. Beck
Associate Managing Editor-Economics

Rising oil consumption is challenging the Organization of Petroleum Exporting Countries production quota-but not the group's ability to meet demand.

In the second half of 1995, the oil market will continue to need more oil from OPEC members than the group claims to be willing to produce with its quota at 24.52 million b/d. If the quota really limited supply, ingredients would be in place for a significant price hike.

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But the quota does not limit supply. Unused production capacity still exists in significant quantities within OPEC. New demand puts pressure on individual members with spare capacity to raise output beyond quota levels. The resulting new supply limits the amount by which prices can respond to demand gains.

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Growth in non-OPEC production intensifies temptations on OPEC members to cheat on quotas and has become a key factor in the market. OPEC producers have seen that if they don't meet incremental demand at the current price, other producers will. Quotas notwithstanding, OPEC members have shown many times that they will produce what the market needs from them, that economic interest comes before OPEC politics.

OPEC members with spare capacity thus raised production to an average of 580,000 b/d above the group quota in the year's first half-700,000 b/d in May alone. Thanks to demand strength, crude prices still were $33.50/bbl higher than they were in the first half of 1994.. And demand continues to rise.

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OPEC eventually will have to raise its quota or acknowledge that the artificial production limit lacks meaning. At present, the only real limit to supply is production capacity, which remains in excess relative to demand and which has demonstrated its ability to grow both within and outside of OPEC when prices rise.

DEMAND GROWTH CRUCIAL

The key to the rest of this year, therefore, is demand growth. Whatever prices do, an expanding market is a firmer basis for industry operations than the other kind. And market expansion remains likely with economies now growing solidly in Europe, the Asia-Pacific region, and-less assuredly-the U.S.

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The International Energy Agency (IEA) projects a 1.1 million b/d increase in worldwide demand for petroleum products this year-to an average of 69.3 million b/d. In the first half, demand averaged 69 million b/d, compared with 67.75 million b/d in first-half 1994. Total worldwide oil supply in the first half averaged 69.2 million b/d vs. 67.9 million b/d in the same period a year earlier.

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Besides OPEC's overproduction, the significant supply trend is growth in production outside the exporters' group. In the first half, non-OPEC supply rose to 41.8 million b/d from 40.7 million b/d in first half 1994. European members of the Organization for Economic Cooperation and Development (OECD) accounted for 350,000 b/d of the increase.

Also significant was a flattening of production from the Commonwealth of Independent States to 7 million b/d. In the past few years, plummeting C.I.S. production has been offset by even faster declines in demand within the old Soviet bloc. The region thus has been able to keep export levels above 2 million b/d-lately closer to 3 million b/d. If internal consumption continues to fall, this year's flattening of production will make even more oil available for export.

A developing question is economic growth in the world's biggest single-country market. The U.S. economy has been expanding since 1991, but a slowdown has become obvious this year. Some analysts expect it to slip into recession. Oil & Gas Journal assumes growth in U.S. gross domestic product (GDP) of 2.7% for 1995.

Demand for petroleum products in the U.S. will rise to 17.87 million b/d this year from 17.718 million b/d in 1994. That's down from the 17.97 million b/d OGJ forecast at the beginning of the year (OGJ, Jan. 30, p. 51). First-half demand didn't live up to expectations-a sign of a slowing economy.

Here are other U.S. highlights of OGJ's Midyear Forecast for 1995 (104232 bytes):

  • Production of crude oil and condensate will average 6.55 million b/d, down 1.7%.

  • Petroleum imports will increase 1.6% to 9.14 million b/d, a record high.

  • Crude stocks will end the year down slightly at 336 million bbl, product stocks at 718 million bbl.

  • Crude input to refineries is projected to be up 0.9% this year at 13.99 million b/d, and total input to distillation units will move up 0.9% to 14.16 million b/d.

  • The rig count will average 730, compared with 775 in 1994.

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WORLDWIDE TRENDS

The factor central to crude prices and industry operations for the rest of the year, demand, benefits from global economic gains that have developed almost in waves.

The current round of U.S. growth began in 1991 and has slowed. The question is whether the slowdown represents a breathing spell for the economy before a new surge or a sign of imminent recession.

Picking up the economic slack are other members of the OECD, especially Europe, where recoveries began 1-2 years after that of the U.S. As a group, those economies are robust. Real GDP for OECD Europe will grow by 3% this year, compared with 2.4% last year. The region's economies contracted by 0.2% in 1993.

Growth in Asia-Pacific countries-where most future petroleum demand will develop-remains strong.

With economic growth and development comes demand for petroleum. IEA projects a 500,000 b/d increase in OECD demand for all of 1995, with demand in Western Europe gaining 300,000 b/d to 13.9 million b/d. Demand in Asia will be up 400,000 b/d, in China and the Middle East, 200,000 b/d.

Demand in the C.I.S. remains an important and unpredictable variable. While total liquids production in the region fell by 3.5 million b/d in 199194, consumption fell by 3.3 million b/d. Whether the slide in C.I.S. consumption will flatten along with production this year is impossible to predict.

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PRESSURES ON OPEC

The key to prices is how much oil the market needs from the marginal supplier, OPEC, That volume depends on total demand, non-OPEC production, and stock changes.

IEA projects non-OPEC production of 42.1 million b /d this year, up 900,000 b/d from 1994's level. OPEC production and stocks must fill remaining demand.

If stock changes are small, demand for OPEC crude and natural gas liquids will average 27.4 million b/d, up 100,000 b/d from 1994. The group is producing about 2.34 million b/d of NGL at present, which leaves the call on OPEC crude at about 25.1 million b/d for the year. That's above the quota but demonstrably within easy reach with quota cheating and stock draws. And it's well within estimated OPEC production capacity of 29-30 million b/d of crude oil alone.

In the third and fourth quarters, demand for OPEC crude and NGL will increase to 27.6 million b/d. NGL output will rise to 2.4 million b/d, leaving demand for OPEC crude at 25.2 million b/d in the third quarter and 25.1 million b/d in the fourth.

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WORLD CRUDE PRICES

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A crude oil price rise that began in the second half of last year carried over into the first half this year. It reflects demand gains, which are expected to persist through the rest of 1995.

The price of world export crude oil averaged $16.87/bbl in the first quarter of this year, compared with $13.32/bbl in the same period of 1994. The price rose in the second quarter to $18.04/bbl, compared with $15.18/bbl in the same period in 1994. Prices slipped at the end of the quarter, averaging $17.64/bbl in June.

The average world export crude price for all of the first half of 1995 was $17-46/bbl, up from $14.25/bbl for the first half of 1994.

The average price for crude exported by OPEC members averaged $17-26/bbl in the first half of 1995, up 23.5% from the same period of 1994. The price for the OPEC reference basket of seven leading export crudes averaged an estimated $17.77/bbl in the first half of 1995, up from $14.76/bbl for the same period in 1994.

OPEC's recent extension of its 24.52 million b/d quota looked like an aggressive price move in the face of higher figures for the expected call on OPEC crude. But key OPEC members were already produce above their individual quotas to balance the market, and revenue incentives remain in place for them to continue doing so.

Group resolve is weak for the substantial production cut that would be needed to raise prices significantly. Pressures for greater market share are as strong as those for higher prices, and the goals conflict.

OPEC's options are clear. It can raise production to gain market share and sacrifice price. At least in theory, it can cut production to raise prices and sacrifice market share. Or it can continue to adjust its production in relation to demand for its oil and enjoy the revenue gains that come from the price increases that naturally occur in a growing market. The only drawback to the last option, from OPEC's point of view, is that it diminishes relevance of the group quota.

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U.S. PRICES

Crude prices in the U.S. naturally tracked worldwide values in the first half-up in general for the period with a slight decline in June.

The average near-month futures price for light, sweet crude on the New York Mercantile Exchange (Nymex) rose from $17.95/bbl in January to $19.87/bbl in April and $19.83/bbl in May, The June average slipped to $18.66/bbl, and the weekly average at the end of the month was $17.74/bbl.

The first-half average for the near-month Nymex crude price was $18.89/bbl, up 16.5% from first-half 1994.

The average posted price for West Texas Intermediate (WTI) crude followed a similar pattern: up 18% at $18.19/bbl.

The U.S. average wellhead crude price, a measure of all crude oil prices in the U.S., was $14.36/bbl in January and February, latest month for which data were available. That compares with $10.62/bbl for the same months of 1994.

Last year the wellhead crude price began to climb in the second quarter and remained well above $13/bbl throughout the remainder of the year, dropping to $13.43/bbl in December.

OGJ projects an average annual U.S. wellhead crude price of $14.50/bbl this year, compared with $13.19/bbl in 1994.

Product prices continue to benefit from the demand gains associated with economic growth. According to the OGJ survey of U.S. gasoline retailers, the self-service unleaded motor gasoline pump price averaged $1.153/gal in the first half of 1995, compared with $1.061/gal in 1994. The average motor gasoline price excluding all federal, state, and local taxes was up 15% from the level a year earlier.

Gasoline pump prices began increasing in April, reflecting increased driving and the rise in crude costs. The pump price at the end of June was $1.211/gal vs. $1.125/gal a year earlier.

According to the American Petroleum Institute, average state and federal gasoline taxes were 40.3/gal in April 1995, up from 39.3/gal in May 1994.

The price rise isn't expected to suppress demand during the second half.

Retail and ex-tax motor gasoline prices didn't rise as much as crude costs did in the first half. Refining margins therefore narrowed. But there's not much excess refining capacity, so any surge in demand or interruption in refinery output would quickly raise prices.

OGJ expects the pump price for all types of motor gasoline, including premium grades, to average $1.279/gal for 1995, up from $1.174/gal for 1994.

Residential heating oil prices for the first 2 months of 1995 averaged 87.7/gal vs. 91.2/gal in the same period last year. The decline was mainly due to lower demand resulting from warmer than normal weather. OGJ expects heating oil prices to average 91.5/gal for the year, compared with 83/gal last year. Stronger distillate heating oil demand due to colder weather or more robust economic growth could push prices higher.

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NATURAL GAS PRICES

Average U.S. natural gas prices in 1995 will be down for the second year in a row. During the first quarter, weak heating season demand and a reduction in working gas in storage led to significantly lower U.S. natural gas prices at the wellhead. Prices strengthened slightly in the second quarter.

Spot natural gas prices averaged $1.40/Mcf during the first quarter and fell to as low as $1.32/Mcf. This was down 34% from an average spot price of $2.12/Mcf during the first quarter last year. The spot price moved up to $1.50/Mcf in the second quarter but was still 18% below the price a year earlier.

The near-month futures market price also was well below year ago levels, averaging $1.47/MMBTU for the first quarter, down 35% from the same period of 1994. The futures market price averaged an estimated $1.69/MMBTU in the second quarter compared to $2.03/MMBTU in 1994.

The U.S. wellhead price for natural gas averaged $1.62/Mcf during the first 2 months of this year, down from $2.07/Mcf in the same period last year.

Average natural gas prices for the entire first half were down significantly from the 1994 levels. The first-half 1995 average for Nymex gas futures prices was $1.67/MMBTU, down from $2.14/MMBTU last year. For the week of June 23, the price was $1.58/MMBTU, down from $2.07/MMBTU a year earlier.

Natural gas prices slumped in the second half of 1994 after moving up significantly in 1993. Gas prices had been relatively stable during 1986-92. They peaked in 1984 at $2.66/Mcf, then dropped sharply 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 jumped in 1992 to $1.74/Mcf and in 1993 to $2.03/Mcf before falling to $1.83/Mcf in 1994.

Even during the years of steady averages, there have been pronounced swings in gas prices due to seasonal swings in demand. These seasonal fluctuations are expected to continue but to be dampened due to increased industrial and utility demand not related to heating requirements.

Natural gas demand during the first 2 months of this year, the latest data available, was down 4% from 1994. But of possibly greater significance to prices was the fact that working gas in storage was drawn down significantly, which reduced demand for new production. Working gas in storage was 2.606 tcf at the end of 1994. The level fell to 1.326 tcf by the end of March. This added 1.28 tcf to the gas supply during the first quarter.

Suppressed gas prices will sustain demand in the second half, particularly in markets where natural gas competes with heavy fuel oil. Closer to normal fourth quarter weather would also help support demand.

Due to the weak prices in the first half, OGJ projects an average U.S. wellhead price of $1.60/Mcf for 1995, down 13% from the $1.83/Mcf in 1994. The wellhead price averaged $2.03/Mcf in 1993. This is based on an expected 2.2%, increase in U.S. natural gas consumption.

THE U.S. ECONOMY

The 2.7% GDP growth that OGJ expects for 1995 compares with 4.1% growth in 1994. Preliminary data indicate growth of 2.7% in this year's first quarter, and there is no evidence yet of the recession predicted by some economists.

U.S. GDP grew by 29.9% during the 8 years ending in 1990, then fell by 0.6% in 1991. GDP increased by 2.3%) in 1992 and 3.1% in 1993.

This year industrial production is expected to increase by 4% following an increase of 5.4% in 1994.

New car sales are expected to remain at 9.3 million in 1995, the same as a year earlier. New car sales were as high as 9.9 million in 1989.

Housing starts are projected to slip to 1.4 million units from 1.5 million in 1994.

U.S. ENERGY DEMAND

Energy consumption in the U.S. will rise modestly this year as a result of the expected economic gains.

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Continuing improvements in conservation and efficiency will keep the growth rate of energy consumption below that of the economy. Total energy consumption is projected to move up 1.3% this year, following a 2% increase in 1994.

The gain will take energy consumption to 86.65 quadrillion BTU (quads) for 1995 from 85.523 quads in 1994. Following declines in the early 1980s, energy consumption grew by 14.7% during the 8 years of economic expansion that ended in 1990. Energy consumption, which was declining in the early 1980's, grew by 14.7% during the period of expansion. Energy demand's growth rate thus averaged about half that of U.S. GDP.

When economic growth reversed, energy consumption fell by 0.1% in 1990 and 0.2% in 1991. In 1992 energy demand moved up 1.3% as the economy recovered. Energy consumption increased 2.1% in 1993 to support an economic growth rate of 3.1%.

Since 1970 the growth in energy consumption has been slower than GDP growth. Energy consumption per unit of GDP fell by 30% between 1970 and 1993-from 23,400 BTU/$ in 1970 to 16,000 BTU/$ in 1994. OGJ expects the decline to continue this year, bringing energy intensity to 15,800 BTU/$ of GDP. The rate of growth in energy consumption tracks closer to GDP growth during periods of rapid economic expansion and periods of low energy costs.

Oil energy demand is expected to move up 0.9% in 1995 to 34.98 quads. Energy from oil increased 2.4% in 1994, when low oil prices stimulated consumption.

Oil's share of total energy demand will amount to 40.4% vs. 40.5% last year and 40.3% in 1993. In 1978, the year of peak oil consumption, the market share was 48.6%.

Demand for energy from natural gas will increase by 2.2% in 1995 to 21.79 quads following a 2.3% increase last year. The natural gas market share will increase to 25.1 % in 1995 from 24.9% in 1994.

Together, oil and natural gas will provide 65.5% of the energy consumed in 1995, compared with 65.4% in 1994.

Increased electric power consumption will boost demand for coal energy by 1.3% in 1995 to 19.795 quads. This follows an increase of 0.6% in 1994. Coal's market share will be 22.8% in 1995 vs. 22.9% last year.

Increased rain and snowfall over the past year will help boost energy output from hydroelectric sources. Energy from hydroelectric and related energy sources will increase 4,7% in 1995 to 3.31 quads. This follows a drop of 2.6% last year. The market share will increase to 3.8% in 1995 from 3.7% in 1994. 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 1994.

Nuclear energy output is expected to fall 1% this year to 6.775 quads. This follows an increase of 4.9% last year. Nuclear's market share is expected to slip to 7.8% in 1995 from 8% in 1994. Nuclear energy output had been moving up gradually in recent years due to an increase in capacity utilization. However, no new nuclear units are being added, and total capacity has started to decline.

Nuclear plants are not expected to sustain the high utilization rates posted in 1994; this will reduce output this year. Expectations are for 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, probably coal and natural gas.

NATURAL GAS USE

Consumption of natural gas in the U.S. is expected to increase 2.2% in 1995 to 21.225 tcf. This follows increases of 2.3% in 1994 and 3.8% in 1993. Consumption of natural gas increased from 16.221 tcf in 1986 to 20.762 tcf in 1994.

The record high for natural gas consumption was 22.049 tcf in 1972. Demand fell when gas prices rose in the late 1970s and early 1980s, reaching as low as 16.221 tcf in 1986.

Falling prices helped boost demand after that. During 1987-91, gas prices averaged $1.68/Mcf, well below the peak of $2.66/Mcf in 1984. This helped gas to compete with fuels such as residual fuel oil and coal and to enter new markets.

Of the gas consumption increase of 1986-94, the industrial sector accounted for 55%. Industrial gas demand rose from 5.579 tcf in 1986 to 8.054 tcf last year. Part of the gain reflects inclusion in the industrial category of gas consumed by cogeneration and combined-cycle power plants.

Demand also moved up in other major gas consumption sectors. Over that same period commercial demand increased 28.2% to 2.971 tcf, residential demand 13% to 4.874 tcf, and utility demand 14.8% to 2.987 tcf. Consumption of natural gas as a pipeline, lease, and plant fuel increased 33.2% to 1.876 tcf.

The sharp increase in prices in 1993 slowed demand growth in 1994, as utilities and industrial facilities with multifuel capability switched to less costly fuels. Last year the largest increase in consumption was posted by the electric utility sector, with an increase of 11.4%. Commercial demand moved up 3.8%. Industrial demand increased only 0.9%, and residential gas use fell 1.7% as weather turned unusually warm late in the year.

In 1995 modest increases in natural gas consumption are expected in the industrial, commercial, and utility sectors. Continued economic growth and lower gas prices will boost demand in these areas. Little change is expected in the residential sector. The year started out with warmer than normal weather, which reduced consumption in the first half. That is expected to be offset by closer to normal weather in the second half of 1995.

In the utility sector, lower prices should help natural gas compete with coal. According to the Energy Information Administration, the cost of coal for steam electric utilities dropped from $1.455/MMBTU in 1990 to $1.355/MMBTU in 1994. The cost of natural gas for these utilities was $2.321/MMBTU in 1990, $2.56/MMBTU in 1993, and $2.23/MMBTU in 1994.

Increased hydroelectric output may reduce the need for electric power from other generating facilities, which would reduce demand for natural gas.

GAS SUPPLY

U.S. marketed production of natural gas in the U.S. is expected to increase by 0.1% to 19.79 tcf after an increase of 3.3% in 1994. U.S. production has been moving up in response to the increase in demand and the higher prices of 1992-94. Domestic output hit a peak of 22-648 tcf in 1972 but slipped to a recent low of 16.859 tcf in 1986.

During the recent period of rising gas demand, imports have been providing a large part of the increase. Imports of natural gas, mainly from Canada, moved up from 750 bcf in 1986 to 2.558 tcf last year.

Imports of natural gas are projected to increase 3.8% in 1995 to 2.655 tcf. Last year imports increased 8.9%. Imports from Canada are projected to move up 4.2% in 1995 to 2.605 tcf. Canadian imports were up 10.2% last year at 2.5 tcf. There will also be a small supply of LNG, primarily from Algeria, which is expected to be 50 bcf in 1995, compared with 51 bcf in 1994 and 82 bcf in 1993. LNG loses economic allure when domestic gas prices are low.

U.S. PETROLEUM DEMAND

In the first half of the year, U.S. demand for petroleum products fell by 0.5% from the comparable period of 1994 to 17.62 million b/d.

Total domestic petroleum demand fell 81,000 b/d, while demand for residual fuel oil fell 288,000 b/d to average 860,000 b/d for the first half. Resid suffered from price competition in the electric utility and heavy industry markets.

Warm winter weather, particularly in January, also took its toll. Heating degree days in January were down 18.5% from the year earlier and down 12.9% from normal. For the first 4 months of 1995 heating degree days were down 7.5% from the same period in 1994. The warm weather was also reflected in demand for distillate, which fell 0.3% to average 3.27 million b/d for the first half.

OGJ is projecting an increase in petroleum product demand in the second half. Demand will be boosted by continued economic growth, closer to normal weather, and relatively stable product prices. Second-half demand is expected to be up 2.1% from a year ago, averaging 18.12 million b/d. The demand increase expected for all of 1995 will be the fourth annual gain in a row. Petroleum demand moved up 2.8% in 1994, 12% in 1993, and 1.9% in 1992.

Demand hit an all time high of 18-847 million b/d in 1978 and then fell sharply to 15.231 million b/d in 1983 as product prices rose.

U.S. PRODUCTS

Motor gasoline demand in the U.S. was up 2.2% during the first half this year, averaging 7.63 million b/d. The year's price gains haven't been enough to keep demand from rising in a growing economy.

For the year motor gasoline demand is projected to average 7.73 million b/d, up 1.7% from 1994 and a record high. Gasoline demand moved up 1.5% in 1994, 2.9% in 1993, and 1.1% in 1992.

Prior to this recent era the record high for motor gasoline demand was in 1978 at 7.412 million b/d. Strong improvements in auto efficiency then reduced demand. Until recently, efficiency improvements offset the demand gains associated with economic and population growth, increases in the vehicle fleet, and average miles driven per vehicle.

But efficiency gains are narrowing. EIA says average vehicle fuel mileage peaked in 1991 at 21.69 mpg and slipped to 21.68 mpg in 1992 and 21.64 mpg in 1993. In 1973 the average was 13.3 mpg.

Distillate fuel oil demand for the first half of this year was down 0.3%.

For the year OGJ projects distillate demand of 3.23 million b/d vs. 3.162 million b/d in 1994, with increases coming in all consumption sectors.

Resid's 25% demand drop from first-half 1994 to first-half 1995 followed a price gain of about the same percentage. The fuel's wholesale price for January averaged 25.944/gal, up 25% from the same month of 1994. At the same time, prices of natural gas, with which resid competes as a boiler fuel, were down 16%.

As a result, electric utility consumption of oil products-mainly resid-for the first 2 months of this year was down 54% from the same months of 1994.

For the year resid demand is projected at 890,000 b/d vs. 1994 consumption of 1.021 million b/d. Demand for the second half of this year is projected at 920,000 b/d.

Demand for LPG and ethane is projected to average 1.91 million b/d in 1995, up 1.6% from 1994. Demand during the first half was up 1% at 1.85 million b/d. Increased chemical consumption associated with the economy has boosted demand.

Demand for all of the other petroleum products is expected to increase this year by 1.7% to 2.57 million b/d. During the first half of 1994 demand averaged 2.52 million b/d, up 2.5% from 1994. Included in this product category are petrochemical feedstocks, special naphthas, lubricants, waxes, petroleum coke, asphalt and road oil, still gas, and miscellaneous products.

U.S. SUPPLY

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U.S. production of crude oil and lease condensate continued to slide during first-half 1995, averaging 6.62 million b/d, down 1.3% from the first half of 1994.

In past years periodic fluctuations in Alaskan output have partially hidden the decline rate in U.S. crude production. But Alaskan North Slope production is now in decline. During the first half, Alaskan output averaged 1.55 million b/d vs. 1.573 million b/d in the first half of 1994. 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 1.2% in the first half this year to average 5.07 million b/d. Lower 48 output has fallen from 9.01 million b/d in 1973 to an average 5.105 million b/d in 1994.

The rate of decline in domestic U.S. output is expected to continue in the second half of the year. However, steady crude oil prices could encourage investment in secondary recovery projects, workovers, and other methods of slowing overall production declines.

OGJ is projecting second-half output of 6.48 million b/d. The 6.55 million b/d average expected for the year will be the lowest level of production since 1954 and be down 27% 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 start of flow from the North Slope. Increases in Alaska coupled with a boom in Lower 48 drilling activity led to a production surge to 8.971 million b/d in 1985. But production has been sliding since then due to sharply lower crude prices, lower drilling, and-more recently-the decline in North Slope output.

Production of NGL plus other hydrocarbon liquids averaged 2.07 million b/d for the first half of 1995, up 8.4% from the year before. Production of NGL and other liquids is projected to average 2.08 million b/d for the year, up 4.8% from 1994. Since 1993 this production category has included oxygenates such as methyl tertiary butyl ether (MTBE) and fuel ethanol.

Because of the increase in NGL output the decline in total liquids production is not as pronounced as that of crude output. U.S. total liquids production is projected to average 8.63 million b/d for 1995, a decline of only 0.2% from 1994. Total liquids production this year will be down 18.9% from the recent high of 10.636 million b/d in 1985.

REFINING

U.S. operable refining capacity increased during first-half 1995 following several years of decline. The increase in product demand has encouraged refiners to boost capacity at existing facilities.

Operable capacity moved up 2% in the first half to an average of 15.4 million b/d and is expected to remain at that level through yearend.

During 1984-92, refining capacity fluctuated in a range of 15.5-15.9 million b/d. Capacity remained relatively steady while product demand increased, boosting utilization rates. Capacity fell to 15.143 million b/d in 1993 and averaged 15.15 million b/d in 1994. The utilization rate climbed to 92.6% last year, close to maximum practical levels.

The increase in capacity will be slightly higher than the expected increase in throughput, and the average utilization rate will slip to 91.9%. But the utilization rate could be up to 96% in the third quarter and precariously close to sustainable capacity.

A major question for U.S. industry and government planners is the sufficiency of domestic refining capacity in the face of growing demand. If capacity growth doesn't keep pace with demand growth-and it cannot so long as grassroots refinery construction remains all but impossible in the U.S.-reliance on imported products must increase.

IMPORTS

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The increase in U.S. imports expected this year will be the fourth annual gain in a row as domestic production declines and consumption builds.

In the first half, total industry imports excluding crude imports for the Strategic Petroleum Reserve (SPR), were down 2%, at 8.59 million b/d. This was partly due to a significant reduction in product imports as product stocks were reduced. 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 boost imports to a second-half average of 9.69 million b/d.

The previous peak year for industry imports was 1977, with average industry imports at 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 sharp rises in crude oil prices. Imports moved up to 8.061 million b/d in 1989, then retreated for 2 years due to weak petroleum demand related to the economic slowdown.

Dependence on petroleum imports will amount to a record 51.1% of U.S. demand in 1995, compared with 50.6% last year. The Previous record high was 47.7% in 1977.

Crude imports, excluding the SPR, are projected to increase 4.3% in 1995 to 7.37 million b/d. Crude imports increased 4.1% last year. During the first half of this year they averaged 7.05 million b/d, up 5.4% from first-half 1994.

In the last half of 1994 and the first half of this year there were no crude imports for the SPR, In recent years additions to the SPR have been sporadic and tied to federal budget considerations. Crude imports by the government for the SPR were halted in August 1990 and not resumed until June 1992. SPR imports averaged 10,000 b/d in 1992, 15,000 b/d in 1993, and 12,000 b/d in 1994. Starting in 1992 part of the additions to the SPR have been U.S. crude oil.

OGJ projects an increase in the SPR level to 593 million bbl in 1995, which would amount to a fill rate of 2,000-3,000 b/d for the year.

Petroleum product imports are expected to fall in 1995 due to the sharp drop in the first half of the year, when product stocks were reduced. Some rebuilding of stocks is expected in the second half.

Product imports will average 1.77 million b/d for the year, down 8.5% from 1994. During the first half product imports averaged 1.54 million b/d, down 25.8% from the same period of 1994. Increased product demand in the second half of 1995 and the desire to replenish depleted product stocks are expected to boost second half product imports to 2 million b/d.

High refining capacity utilization rates mean a growing role for product imports in meeting future demand growth.

The leading source of U.S. crude imports during the first quarter of this year was Saudi Arabia, which supplied 1.269 million b/d, 18.6% of the total. Crude imports from Saudi Arabia averaged 1.297 million b/d for all of last year. They have been 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 Venezuela 1.118 million b/d, Canada 955,000 b/d, and Mexico 920,000 b/d.

Total crude imports from the OPEC countries averaged 3.469 million b/d for the first quarter, 50.8% of the total. Crude imports from OPEC averaged 3.58 million b/d during all of 1994. Crude imports from OPEC were only 41% of the total back in 1985, averaging 1.312 million b/d.

First quarter product imports averaged 1.613 million b/d. Product imports averaged 1.933 million b/d in 1994. Canada was the leading source for product imports at 333,000 b/d. Product imports from Venezuela averaged 313,000 b/d, and imports from the Virgin Island refineries averaged 300,000 b/d. Product imports from OPEC countries averaged 638,000 b/d, 39.6% of the first-quarter total.

Total imports from OPEC during the first quarter of this year averaged 4.107 million b/d. This was 48.6% of total U.S. imports in the first quarter, compared with 1994 when OPEC provided 47.2% for the full year.

STOCKS

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There was little change in U.S. stock levels last year. Total industry stocks finished the year at 1.061 billion bbl, compared with 1.06 billion bbl at yearend 1993. Crude and product stocks were boosted in 1993 after falling close to minimum operating levels the year before. Since then stock levels have been maintained at a level more consistent with the level of product demand.

During the first half of this year stocks were reduced significantly and provided 230,000 b/d of first-half supply. Much inventory probably will be replenished during the remainder of 1995.

Uncertainty about future crude oil prices could encourage refiners to add to crude stocks before the winter beating season. Crude oil stocks are expected to finish the year at 336 million bbl, down only 0.3% from yearend 1994. This level gives refiners flexibility to meet changing patterns of product demand. Product stocks are also expected to be rebuilt in the second half and to finish the year at 718 million bbl, compared with 724 million at yearend 1994.

At the end of the first half crude oil stocks were reduced to an estimated 324 million W. EIA considers 320 million bbl the minimum operating level.

At the end of the first half product stocks were estimated at 695 million bbl, down from 724 million bbl at yearend 1994. The minimum operating level for product stocks is estimated at 670 million bbl, although minimum levels for individual products vary seasonally.

Refiners have traditionally been more willing to deplete product stocks than crude oil stocks. Crude stocks provide refiners the flexibility to meet unexpected changes in demand for any product. Now that spare refining capacity is decreasing, however, refiners may not be able to step up throughput in response to a demand surge. Additional product stocks may be necessary.

At yearend 1993, total industry stocks represented 61.5 days of supply at 1993 demand levels. Last year, due to the surge in demand, this ratio fell to 59.9 days of supply at yearend. This year the modest decline in stock levels and increased demand will result in yearend 1995 stocks at only 59.8 days of supply. Refiners will not allow stocks to fall much below that level.

The SPR grew steadily during 1977-90 to 586 million W. A withdrawal during the Persian Gulf conflict of 1990-91 took the level to 569 million W. Sporadic imports since then brought the SPR total to 592 million b/d last year, where it remained at the middle of this year.

Copyright 1995 Oil & Gas Journal. All Rights Reserved.