The recent announcement of plans for a 1.2 million barrels per day (bbl/d) cut in oil production by the Organization of Petroleum Exporting Countries (OPEC) has not yet made much of an impact on world oil prices, as the market awaits evidence of substantial compliance. Recent spot prices for West Texas Intermediate (WTI) crude oil are the lowest since February 2005. Demand for petroleum should grow as the winter heating season ramps up. With some reduction in OPEC oil production, the price of WTI crude oil is projected to rise over the next several months. The price of WTI crude oil is projected to average around $66 per barrel in 2006 and $65 per barrel in 2007 (West Texas Intermediate Crude Oil Price). Daily natural gas spot prices, which fell throughout September because of moderate temperatures and high inventories in underground storage, have risen sharply in recent weeks. This price movement was not unexpected once the heating season began. Henry Hub Natural Gas Spot Prices are projected to average $7.06 per mcf in 2006 and increase to an average of $7.79 per mcf in 2007. Our forecast of winter heating fuel expenditures has not changed significantly from last month. Average household heating fuel expenditures are projected to be $928 this winter compared to $947 last winter. This is the first winter since the winter of 2001-02 in which home heating fuel expenditures are not expected to significantly increase over the prior winter. In response to rising oil inventories and declining world oil prices, OPEC announced that it would cut its oil production by 1.2 million bbl/d effective November 1, 2006. This production cut differs from previous ones in that the stated intent is to reduce production from actual output levels, not just from OPEC production quotas. Although OPEC announced the target reductions each country is supposed to make, it did not specify the production level that each country is to use as the starting point for making its cuts. The absence of a benchmark contributes to the uncertainty over the amount by which each OPEC member will cut its production. This Outlook assumes that OPEC crude oil production will decline by almost 0.8 million bbl/d from October levels for the remainder of 2006 (see Table SP1 below). With the expected reduction in OPEC oil production along with growing petroleum demand during the winter heating season, the average monthly price of WTI crude oil is projected to rise by about $2 per barrel each month over the next several months. The OPEC oil production cuts provide only a temporary increase in surplus world crude oil production capacity. A projected increase in world oil consumption growth in 2007 is expected to result in an increase in the demand for OPEC oil from 2006 levels. Surplus world crude oil production capacity, all of which is located in Saudi Arabia, is projected to increase only slightly in 2007 (World Oil Surplus Production Capacity), thus remaining near 30-year lows.
Despite prevailing high prices, world petroleum consumption is projected to grow by 1.0 million bbl/d in 2006 and by 1.5 million bbl/d in 2007 (World Oil Consumption Growth). This reflects a downward revision of 0.2 million bbl/d for growth in 2006 compared with the previous Outlook, largely because of upward revisions to historical consumption levels for 2005. Petroleum consumption in the United States is expected to rise by 0.3 million bbl/d in 2007, following another year of relatively flat consumption. The United States and China are projected to account for over half of the worldwide growth in oil consumption in 2007. Demand growth is also projected to be strong in the oil-exporting countries of the Middle East, which are benefiting from their current high oil revenues. World oil inventories increased in Organization for Economic Cooperation and Development (OECD) countries during the first half of 2006 as concerns about potential supply problems rose. Some of these potential problems, such as further disruption during hurricane season in the Gulf of Mexico, never materialized, leading to greater than expected increases in inventory levels. Despite rising inventory levels during July and August, EIA projects that OECD inventories will decrease during the fourth quarter of 2006 and during 2007. By the end of 2007, EIA projects days of supply of OECD inventories to finish at the bottom of the normal range for that time of year, which is expected to maintain a tight market. New supplies from non-OPEC countries will partially meet anticipated demand growth. The net annual growth in non-OPEC oil production for 2006 is projected to total around 0.6 million bbl/d (Growth in World Consumption and Non-OPEC Production). Although production will be limited at first, Russia’s Sakhalin I Project and the United Kingdom’s Buzzard field should begin adding new supply late in the fourth quarter. Non-OPEC production is expected to rise by 1.3 million bbl/d in 2007 (International Oil Supply Charts), as new projects in the Caspian Region, Africa, and Brazil add more than 0.9 million bbl/d of production. U.S. Petroleum Products Consumption in 2006 is not expected to vary much from levels seen in 2005. Strong transportation demand growth (gasoline, diesel fuel, and jet fuel) in the second half of 2006 is expected to compensate for less-than-typical demand growth for these fuels in the first half of 2006. Declining natural gas prices have pushed demand for residual fuel oil well below 2005 levels, further dampening anticipated 2006 growth in total petroleum product demand. In 2007, however, total product consumption is projected to average 21.0 million bbl/d, up 1.5 percent, with all petroleum categories contributing to that growth. Domestic oil production in 2006 is expected to average 5.2 million bbl/d, which is virtually unchanged from that of 2005, when hurricane activity depressed output for much of the second half of the year. In 2007, production is projected to average 5.4 million bbl/d, reflecting not only recovery from the impact of the 2005 hurricanes that continued to depress Gulf of Mexico production in the first half of 2006, but also the startup of new deepwater production. Distillate inventories are expected to be adequate during the heating season. As of September 30, the beginning of the heating season, total distillate fuel inventories were 151 million barrels, almost 24 million barrels above the average over the previous 5 years. Inventory drawdown this winter got off to a strong start with a 9-million-barrel draw in October, the largest October decline on record. Total distillate fuel inventories at the end of winter (March 31, 2007) are projected to be 118 million barrels, 2 million barrels below last season’s levels but 8 million barrels higher than the previous 5-year average. Total motor gasoline stocks are also projected to remain at or slightly above the previous 5-year average during the winter season. Inventories as of October 31 were an estimated 204 million barrels, up 3 million barrels from last year, and are projected to be 214 million barrels at the beginning of next year’s driving season (March 31, 2007), up 4 million barrels from last year. The sharp 11.5 million barrel October decline in total gasoline stocks moved absolute inventories from the top to the middle of the normal range, and to the bottom of the days-of-supply range. This sets the stage for an increase in gasoline margins both near-term and by spring. Relatively high levels of natural gas in storage and a forecast of slightly warmer-than-normal weather (though not as warm as last winter) should keep Henry Hub spot prices below $9 per mcf through the winter heating season. EIA projects the monthly average Henry Hub spot price will peak in January at roughly $8.70 per mcf. The Henry Hub price is expected to average $7.06 per mcf in 2006 and $7.79 per mcf in 2007. No growth in total natural gas consumption is projected in 2006 compared with 2005, but a 1.3-percent increase is expected in 2007 (Total U.S. Natural Gas Consumption Growth). The expected colder winter, compared with last winter, raises residential and commercial demand while the forecast for a cooler summer lowers natural gas demand for electricity generation. Residential and commercial sector consumption grow by 7.5 percent and 3.9 percent, respectively, in 2007, as the number of heating degree-days is expected to increase by about 7 percent. Industrial sector natural gas consumption is expected to show only modest growth of 1.2 percent over 2006. Power sector consumption, on the other hand, is expected to decline by 4.3 percent in 2007, following 7.4-percent growth in 2006, as total cooling degree-days next year are expected to be about 12 percent lower than in 2006. Domestic dry natural gas production is expected to increase by about 1.3 percent in 2006 and 0.4 percent in 2007. Net imports of natural gas are expected to show a 6.1-percent decline in 2006. In 2007, net imports are expected to increase by 2.6 percent primarily due to the rise in liquefied natural gas (LNG) imports. Projected LNG imports in 2006 are below 2005 levels because of price competition with Europe. The growing availability of supplies from liquefaction facilities in Trinidad and Tobago and Nigeria contribute to the expected increase in LNG imports in 2007. However, U.S. LNG imports will continue to be affected by price competition from other LNG-consuming economies, particularly in Europe. As of October 27, working gas in storage was 3,452 billion cubic feet (bcf), a level 288 bcf above the year-ago level and 276 bcf above the 5-year average for that date (U.S. Working Natural Gas in Storage). Storage levels are near EIA’s estimated maximum working gas storage capacity of about 3,600 bcf. Working gas inventories are projected to end the winter (March 31, 2007) at about 1,405 bcf, 285 bcf below the level of 1,690 bcf reached at the end of March 2006, but still about 150 bcf above the average of the last 5 years. A number of States instituted temporary retail price caps over the past decade in order to ease uncertainties associated with the restructuring of the electric power industry. Many of these caps are expiring during 2006-2007, while peak-load fuel prices have been extremely volatile, and some regions have witnessed double-digit growth in electricity prices. Residential electricity prices in 2006 are projected to be 10.9 percent higher than 2005 prices. Legislatures in Virginia, Maryland, and Illinois have implemented or are considering extensions of rate caps to help stabilize prices. Rate caps in Texas and Delaware are set to fully expire in 2007. Attempting to project the level of future electricity prices is difficult in this economic climate, but rates are likely to increase as higher fuel costs are passed through to retail customers. During 2007, residential electricity prices are projected to increase by about 2.4 percent to 10.7 cents per kilowatthour. Total U.S. coal consumption is expected to remain flat in 2006 and increase by 1.9 percent in 2007 (U.S. Coal Consumption Growth). Coal consumption in the electric power sector is likewise expected to be flat in 2006, but grow by 2.1 percent in 2007 |
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