Overview. The worsening global economy and a weak oil consumption outlook are keeping the world oil market well supplied, despite two downward revisions in production targets by the Organization of the Petroleum Exporting Countries (OPEC) within the past few months. Lower global oil demand and rising surplus production capacity through at least mid-year 2009 reduce the possibility for a strong and sustained rebound in oil prices over that period. OPEC is scheduled to meet in Vienna on March 15, which could lead to another production cut to mitigate some of the slack in the world oil market. However, near-month oil prices will likely be driven primarily by the global economy. Global real gross domestic product (GDP, weighted according to shares of world oil consumption) is assumed to decline by 0.1 percent in 2009 and rise by 3.0 percent in 2010, versus last month’s assessment of 0.6-percent growth in real GDP in 2009 and 3.0-percent growth in 2010. Consumption. World oil consumption is projected to fall by 1.2 million barrels per day (bbl/d) in 2009, representing an additional decline of 400,000 bbl/d from last month’s Outlook. World oil consumption is expected to rebound in 2010, growing by more than 1.2 million bbl/d, due to an expected recovery in the global economy. Oil consumption growth over the next 2 years is concentrated in countries outside of the Organization for Economic Cooperation and Development (OECD), particularly China, the Middle East, and Latin America, offsetting projected declines in OECD oil consumption (World Oil Consumption). If the world economy recovers sooner than EIA now anticipates, oil consumption could be higher than expected, putting upward pressure on oil prices. Non-OPEC Supply. Non-OPEC oil supply is expected to grow by 150,000 bbl/d in 2009 and 130,000 bbl/d in 2010. The expected growth in non-OPEC supply over the next 2 years comes in stark contrast to the 330,000-bbl/d decline seen in 2008, which was the result of longer-than-expected delays in key projects, larger-than-expected decline rates in mature basins, and supply disruptions in the Gulf of Mexico and Central Asia. The largest sources of growth over the forecast period are the United States, Brazil, and Azerbaijan, offset by large declines in production in Mexico, the North Sea, and Russia. The expected decline in Russian output in 2009 (-160,000 bbl/d) is especially noteworthy. Russian oil production grew by 3 million bbl/d from 2000 through 2007, representing 75 percent of total non-OPEC oil production growth over that period. There are downside risks to the outlook for non-OPEC supply, as additional project delays are certainly possible given the financial crisis and the current price environment. Sustained lower oil prices bring into doubt the viability of some high‐cost non‐OPEC projects, especially those utilizing nonconventional technology or those seeking to exploit frontier oil basins. The credit crunch associated with the global economic crisis can also make it difficult to acquire financing for new projects or even to finance the investment required to prevent accelerated declines at producing fields. EIA's forecast reflects an attempt to account for some of these potential delays. OPEC Supply. OPEC producers are cutting crude production targets in response to lower prices and eroding consumption. Estimated OPEC crude oil production fell by 1 million bbl/d during the fourth quarter of 2008, reaching 30.7 million bbl/d. OPEC crude oil production is expected to fall by an additional 1.6 million bbl/d in the first quarter of 2009 to 29.1 million bbl/d, the lowest level in 5 years, largely resulting from lower production in Saudi Arabia. The decline of 2.6 million bbl/d over this period represents nearly two-thirds of the 4.2-million-bbl/d cut in OPEC’s production target announced at its December meeting. For the year, OPEC crude oil production is expected to average 29.4 million bbl/d, then rise to 30.1 million bbl/d in 2010. In addition, EIA expects that OPEC production of non‐crude liquids will rise substantially next year, growing by 660,000 bbl/d in 2009 and by 870,000 bbl/d in 2010, due to increasing condensate and natural gas production. The combination of lower demand for OPEC crude oil, increasing production of non-crude liquids, and the capacity expansions expected in several OPEC countries means that surplus production capacity could increase dramatically over the next 2 years. OPEC surplus production capacity could average 4.3 million bbl/d in 2009, eventually exceeding 5 million bbl/d by the end of 2010. By comparison, OPEC surplus production capacity ranged from 1 to 2 million bbl/d over the past 5 years (OPEC Surplus Oil Production Capacity). The lack of surplus production capacity was a crucial factor during the run-up in oil prices through the first half of 2008. If OPEC does hold 4 to 5 million bbl/d of surplus production capacity over the next 2 years, this could act to cushion the world oil market and help mitigate the price effect of perceived or actual supply disruptions. Inventories. Preliminary data indicate that OECD commercial inventories stood at 2.58 billion barrels at the end of 2008, equivalent to 52 days of forward cover (Days of Supply of OECD Commercial Stocks), above average levels for that time of year. Measured as days of forward cover, OECD commercial inventories are projected to remain above average levels through the end of 2010. High crude inventories in some markets, along with a growing use of floating storage, are signs that the oil market is well supplied. Along with ample OPEC surplus production capacity, high commercial inventories should help mitigate any strong upward price pressures. Consumption. Total petroleum products consumption in 2008 declined by almost 1.2 million bbl/d, or 5.8 percent, from the 2007 average, the largest annual decline since 1980 (U.S. Petroleum Products Consumption Growth). The major factors behind the fall in consumption were a rapid rise in retail prices to record levels during the first half of 2008 followed by a weakening economy in the second half. Motor gasoline consumption in 2008 declined by 320,000 bbl/d, or 3.4 percent. Despite the cold weather that gripped much of the Lower-48 States in December, distillate fuel consumption in 2008 fell by 5.4 percent from the previous year as a result of precipitous declines in transportation consumption of diesel fuel. Major reductions in airline capacity during the fourth quarter contributed to the 100,000-bbl/d, or 6.2-percent, drop in jet fuel consumption. Total petroleum products consumption in 2009 is projected to fall by a further 460,000 bbl/d, or 2.4 percent, because of continued economic weakness. Consumption of both motor gasoline and distillate fuel are projected to decline by about 100,000 bbl/d each. Jet fuel is forecast to fall by a further 60,000 bbl/d. The expected economic recovery in 2010 is projected to boost total petroleum products consumption by 220,000 bbl/d, or 1.1 percent. Production. In 2008, domestic crude oil production averaged 4.95 million bbl/d, down by 110,000 bbl/d from 2007 (U.S. Crude Oil Production). However, in 2009, domestic output is projected to increase by about 400,000 bbl/d to an average of 5.35 million bbl/d. This would be the first increase in production since 1991. Output is projected to rise by a further 130,000 bbl/d in 2010. Contributing to the increases in output are the Gulf of Mexico Thunder Horse platform, which is coming on stream now, and the Tahiti platform, expected to come on stream later this year. Prices. WTI prices averaged almost $100 per barrel in 2008, with daily spot prices ranging from almost $150 per barrel in early July to about $30 per barrel towards the end of the year. Under current economic and world crude oil supply assumptions, WTI prices are expected to average $43 per barrel in 2009 and $55 per barrel in 2010 (Crude Oil Prices). The possibility of a milder recession or faster economic recovery, lower non-OPEC production because of the current low oil prices and financial market constraints, and more aggressive action to lower production by OPEC countries could lead to a faster and stronger recovery in oil prices. Regular-grade gasoline prices are projected to average $1.95 per gallon in 2009 and $2.19 per gallon in 2010. Because of lower motor gasoline consumption, refining margins for gasoline are expected to remain low for much of 2009 but are expected to increase slightly in 2010 as consumption begins to recover. On-highway diesel fuel retail prices, which averaged $3.79 per gallon in 2008, are projected to average $2.28 per gallon in 2009 and $2.55 in 2010. The expected continuation of the decline in diesel fuel consumption in the United States this year as well as a slowing of the growth in distillate fuel usage outside the United States are projected to result in a narrowing of refining margins for distillate throughout the forecast. Consumption. Total natural gas consumption is projected to decline by 1.3 percent in 2009 and then increase by 0.6 percent in 2010 (Total U.S. Natural Gas Consumption Growth). The expectation of limited weather-driven consumption growth in the residential and commercial sectors in 2009 is outweighed by the implications of continued economic weakness in the industrial and electric power sectors. Consumption in the industrial and electric power sectors is expected to decline by 5.1 and 1.0 percent, respectively, in 2009. Consumption growth in 2010 remains largely dependent upon the timing and pace of economic recovery. Based on current assumptions, 2.2-percent growth in the electric power sector combined with slight growth in the residential and industrial sectors are all expected to contribute to 2010 consumption growth. Production and Imports. Total U.S. marketed natural gas production is expected to rise slightly in 2009 and fall by 1.1 percent in 2010. The dramatic decline in drilling activity, as total working natural gas rigs have declined by more than 31 percent since August 2008, is expected to contribute to lower production during the second half of 2009. Despite the cutback in drilling activity, the current outlook suggests that some production curtailments may be necessary during the latter part of 2009 in order to balance the market. Nevertheless, this year’s marketed production from the Lower-48 non-Gulf of Mexico (GOM) is expected to increase by 1.1 percent due to the low operating cost of wells currently in use and the lagged effect of aggressive drilling programs during the latter part of 2008. In contrast, the natural decline in production from existing fields and long-term decline in drilling activity are expected to lead to a 6.4-percent decrease in production in the Federal GOM this year. In 2010, annual production is projected to decline relative to 2009 in the Federal GOM and Lower-48 non-GOM by 6.3 and 0.6 percent, respectively. U.S. imports of liquefied natural gas (LNG) are expected to reach about 369 billion cubic feet (Bcf) in 2009, a slight increase over the volume received in 2008. Shipments of LNG to the United States this year will be affected by the timing of supply additions in Russia, Norway, Qatar, and Yemen and the status of global natural gas inventories in LNG-consuming regions. In 2010, U.S. LNG imports are projected to be about 463 Bcf. Inventories. On January 30, 2009, working natural gas in storage was 2,179 Bcf (U.S. Working Natural Gas in Storage). Current inventories are now 17 Bcf above the 5-year average (2004–2008) and 60 Bcf above the level during the corresponding week last year. Storage inventories are expected to finish the 2009 withdrawal season (March 31, 2009) at about 1.5 trillion cubic feet (Tcf), roughly 100 Bcf above the previous 5-year average for that time. This fall, inventories are expected to approach the previous high of 3,565 Bcf recorded at the end of October 2007. Prices. The Henry Hub spot price averaged $5.40 per Mcf in January, $0.60 per Mcf below the average December spot price. For all of 2008, the Henry Hub spot price averaged $9.13 per Mcf. Despite colder-than-normal weather last month, prices continued downward in response to the ongoing drop in natural gas demand. Natural gas prices in 2009 are expected to be largely driven by the extent of the supply response to the persistence of sluggish consumption in light of the current economic downturn. Prices are expected to remain weak as inventories build toward capacity this fall. A warmer summer or faster economic recovery than anticipated could push consumption and prices higher than expected. Prices are projected to recover in 2010 as economic growth contributes to an increase in demand. The Henry Hub spot price is expected to average $5.01 per Mcf in 2009 and $5.93 per Mcf in 2010. Consumption. Total electricity consumption is projected to decline by 0.8 percent in 2009 (U.S. Total Electricity Consumption), including an expected decline of nearly 5 percent in industrial sector electricity sales. Total electricity consumption is expected to grow by 1.3 percent in 2010 as economic recovery boosts sales of electricity to the residential and commercial sectors. Prices. Residential electricity prices, which increased by an estimated 6.5 percent last year, are projected to rise at lower-than-normal annual rates of about 2 percent in 2009 and 2010 (U.S. Residential Electricity Prices). Industrial electricity prices are expected to increase by just 1 percent in 2009 after having grown by 10 percent last year. Consumption. Coal consumption in the electric-power-sector grew by 1.3 percent during the first half of 2008, but a significant decline in the second half of 2008 caused annual electric-power-sector coal consumption to fall by 0.5 percent in 2008. The economic slowdown in 2009 will lead to a decline in electricity consumption, and this factor combined with projected increases from other generation sources (nuclear, petroleum, and wind) will lead to a 1.2-percent decline in electric-power-sector coal consumption. An expected increase in electricity consumption of 1.3 percent in 2010 will lead to a 1.8-percent increase in electric-power-sector coal consumption. Consumption growth in the coke plant sector is estimated to have been flat in 2008 but is expected to fall by 11 percent in 2009 and by 5.7 percent in 2010 due to the economic slowdown. Retail and other industrial sector coal consumption is estimated to have declined by 2.2 percent in 2008 and is expected to decline by an additional 13.8 percent in 2009. Retail and other industrial sector coal consumption growth is projected to be 3.5 percent in 2010 (U.S. Coal Consumption Growth). Production. A significant increase in coal exports in 2008 contributed to a 2.1-percent increase in coal production. Production is expected to fall by 4.4 percent in 2009 as lower total domestic coal consumption is combined with declines in exports and an increase in imports. Production is projected to increase by 2.5 percent in 2010 as domestic consumption and exports increase with an improving economy (U.S. Annual Coal Production). Exports. Strong global demand for coal and supply disruptions in several key coal-exporting countries (Australia, South Africa, and China), spurred a 38-percent increase in U.S. coal exports in 2008. Reductions in global coal demand, coupled with the return to normal supply conditions in other major coal-producing and exporting countries, are expected to reduce U.S. coal exports by about 10 million short tons, a 11.7-percent decrease, in 2009. The improving global economy will spur global coal demand in 2010 and this will lead to a projected 12-percent increase in exports. Prices. Despite record increases (some well over 100 percent) in spot prices for several types of coal, the average delivered coal price to the electric power sector is estimated to have increased by 16 percent in 2008. Although the rise in spot prices did contribute to the increase in the cost of coal delivered to the electric power, the rise in transportation costs was the primary reason for the cost increase. Declines in electricity demand and lower transportation costs should see the delivered coal price remain flat in 2009. The delivered coal price to the electric power sector is projected to increase by 1.3 percent in 2010 to $2.09 per million British thermal units.
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