U.S. oil and natural gas demand to increase in 1999

Robert J. Beck
Associate Managing Editor-Economics

U.S. oil demand is expected to rise in 1999, following a modest increase this year.

Oil production in the U.S., however, will continue to slide both years as it feels the bite of low oil prices.

Natural gas demand in the U.S. will rebound to a record in 1999, after dipping in 1998, and gas production will continue to rise.

These are among the key findings in the short-run forecast of U.S. oil and gas supply and demand by the Independent Petroleum Association of America's supply and demand committee.

Meanwhile, the committee also issued a short-term forecast for the international oil market that sees a modest but fragile recovery.

U.S. petroleum demand

The committee sees U.S. total demand for petroleum rising 0.6% in 1998 to 18.73 million b/d.

Assuming normal weather, the committee sees renewed growth next year, with demand increasing 1.5% to 19.02 million b/d.

That will be a record high for U.S. petroleum demand, surpassing the previous record of 18.847 million b/d, set in 1978.

Motor gasoline demand in the U.S. is forecast to increase 1.4% in 1999 and average 8.27 million b/d. That follows an estimated 1.7% increase this year to 8.16 million b/d.

Strong economic growth and low gasoline prices helped consumption in 1998, and that boost is expected to continue in 1999.

The level of air traffic activity has stagnated in 1998 because of strikes. But both revenue passenger miles and freight ton-miles are expected to increase in 1999. Thus aviation fuel demand is estimated to be off 1.2% in 1998.

But demand is projected to increase 1.1% in 1999 to 1.6 million b/d.

Demand for distillate fuel oil is projected to rise about 1.7% in 1998 due to strong trucking consumption. Distillate demand is expected to increase another 1.4% in 1999, to 3.539 million b/d. On and off-highway diesel fuel consumption will increase along with home heating oil demand.

Demand for residual fuel oil hit a low of 797,000 b/d in 1997. But low oil prices helped make resid more competitive with natural gas, boosting demand about 5.8% to the 843,000 b/d forecast for 1998. The committee is projecting that resid demand will move up another 1.2% in 1999 to 854,000 b/d.

Demand for all other petroleum products is expected to fall 2.3% in 1998, due largely to a drop in petrochemical feedstock consumption, but then move up 2% in 1999.

Petroleum supply

In terms of U.S. oil supply, the committee expects a rise in Gulf of Mexico output to offset a further decline in Alaskan production in 1998. However, other Lower 48 U.S. production is being hit hard by low oil prices, and that will result in a drop in total U.S. output this year of 1.5% to 6.354 million b/d.

The committee expects that the hangover from low oil prices will continue into 1999, and that U.S. production will slip another 1.3% to 6.274 million b/d-the lowest U.S. output in more than 47 years.

Total U.S. petroleum imports are estimated to be up 3.7% in 1998, with crude oil imports up 6.5% and product imports down 8.1%. In 1999, growth in oil demand and declining domestic production, will increase U.S. reliance on imports. Total U.S. imports will rise 0.8% in 1999 to over 10.6 million b/d-or 4.28 million b/d above what the U.S. was importing in 1973, at the time of the Arab oil embargo.

The committee expects U.S. crude oil imports to remain constant next year, while petroleum product imports move up 6.6% to 1.9 million b/d. Imports as a share of total U.S. oil demand will be 56.2% in 1998 and 55.9% in 1999. This is up from 54.6% in 1997.

Natural gas demand

In 1998, U.S. demand for natural gas is expected to slip 1.1% to 21.7 tcf.

A very warm winter and competitively priced oil products held down natural gas demand in three of the consuming sectors: residential, commercial, and industrial. Only in the electric utility sector did gas demand post an increase.

Residential demand for natural gas fell about 5.5%, and commercial demand was down 4.3%. Industrial gas demand declined 0.4%. These declines were partially offset by a 6% increase in electric utility gas consumption, owing to the prolonged hot summer in the Southwest and in California and lower nuclear and hydro output. With a return to normal weather, overall U.S. natural gas demand is expected to rebound in 1999. Demand is projected to move up to 22.3 tcf in 1999, a record. Residential and commercial demand are expected to increase 5.4% and 5.1%, respectively. Industrial gas demand is expected to increase only 1.6%. Gas consumption by electric utilities is expected to decrease by 1.4% in 1999, under assumptions for a milder summer.

U.S. gas exports, which are a very small part of total U.S. gas demand, are expected to remain at about the same level as the past 4 years. The committee expects gas exports to be 171 bcf in 1999, down from the 216 bcf peak in 1992. The elimination of the natural gas tariff under the North American Free Trade Agreement is being discussed, and that would bolster U.S. exports to Mexico. Several pipeline projects are under consideration that would increase exports to Mexico.

Natural gas supply

U.S. gas production is estimated to be up 1.7% in 1998 to just over 19 tcf, a level last seen in 1981. The 1998 gains are mainly from the Gulf of Mexico. U.S. gas output is expected to rise another 1% in 1999, to 19.3 tcf.

Total U.S. natural gas imports are expected to increase 2.8% in 1998, much slower than growth levels seen during the past decade. Two major expansions of Canadian export pipelines to the U.S. are expected in service late in 1998 or early in 1999.

The committee expects imports will increase 6.4% to 3.3 tcf in 1999.

The U.S. natural gas industry will enter the winter of 1998-99 with a higher level of storage than in recent years, near capacity.

In addition to meeting seasonal demand, storage is increasingly used to capture the value of price differentials between periods and regions. At the end of October, gas inventories stood at more than 3 tcf, which should be sufficient to meet demand even in extreme weather conditions.

International

Worldwide, the committee predicts only a modest 0.7% increase in global oil demand for 1998, blaming the economic collapse in much of Asia.

Oil demand is expected to start to recover in Asia in 1999, and world oil consumption is projected to move up 1.7% in 1999.

That would be a gain of 1.3 million b/d. The committee emphasized the uncertainty and risk inherent in this forecast, because it assumes the start of an economic recovery in Asia and the avoidance of similar problems elsewhere in the world.

With limited growth in demand, global oil markets in 1998 have come under sharp downward pressure, as growth in oil supply has far exceeded growth in demand. Supply has increased both from non-OPEC and OPEC sources, resulting in a sharp increase in oil stocks, particularly in first half 1998.

However, with OPEC's midyear agreement to restrain production being fairly well adhered to, the growth in oil stocks has slowed, and seasonal patterns are expected to reappear.

The committee expects non-OPEC production to continue to grow next year with an expected increase of more than 1 million b/d in 1999. As a result, the pressure will remain on OPEC to continue to restrain production near current levels. Global stocks are expected to remain quite high in 1999 in the absence of further cuts from OPEC or shortfalls in expected non-OPEC production.