This Week In Petroleum

Energy Information Administration ^ | 12/13/2006 | EIA

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Call(ing) on OPEC

As OPEC ministers gather in Nigeria on Thursday, December 14 to discuss whether they should cut production further, many people are voicing their opinions. Recently, both the U.S. Secretary of Energy and the Executive Director of the International Energy Agency (IEA) called on OPEC to refrain from further cuts in production quotas. While the price of oil certainly plays a large part in OPEC’s decision making, the expected “call on OPEC crude oil” is another important factor that the ministers will consider.

The “call on OPEC crude oil” is defined as the difference between the global demand for oil and the total supply of non-OPEC oil plus the non-crude oil supply from OPEC (primarily natural gas liquids). In essence, the “call on OPEC crude oil” is the amount of crude oil OPEC would need to produce to balance supply and demand without causing inventories to change. If OPEC produces more crude oil than the call on OPEC crude oil, petroleum inventories will increase; producing less causes inventories to decline. When looking ahead to 2007, forecasting the expected growth in non-OPEC supplies (this and all further references to non-OPEC supply include OPEC non-crude oil supply) and the growth in global demand is critical in determining the need for OPEC crude oil production.

Under EIA’s latest forecast for 2007 world oil supply and demand, released yesterday in the December 2006 issue of the Short-Term Energy Outlook, the call on OPEC crude oil during 2007 is expected to be close to OPEC producers’ 2006 average production level. Since OPEC members’ production is currently running about 0.5 million barrels per day below the 2006 annual average rate, our forecast suggests the need for increases rather than decreases in OPEC members’ production over the coming year.

EIA projections regarding the call on OPEC reflect our assessment of world oil demand and net supply changes from non-OPEC producers. Projected world oil demand grows by 1.5 million barrels per day in 2007. New supplies from non-OPEC countries, in addition to expected growth in OPEC non-crude oil supplies, should meet most, but not all, of this anticipated demand growth. Non-OPEC supply is expected to rise by 1.3 million barrels per day in 2007, as new projects in the Caspian Region, Africa, and Brazil add more than 0.8 million barrels per day of production. This forecast also includes production from Russia’s Sakhalin I Project and the United Kingdom’s Buzzard field, both of which should begin adding new supply over the next two months, although production from these fields will be limited initially. Key components that may lower growth in non-OPEC supply during 2007 would include weather-related events, steeper rates of production decline at already mature fields, and continuing new project slippage.

There is a wide range of opinion regarding the outlook for both demand and supply. Some forecasters expect demand to increase by about 2 million barrels per day, while non-OPEC supply only increases by a little more than 1 million barrels per day. If you believe this will be the picture for 2007, you would envision the need for a much larger increase in OPEC production to keep inventories from falling precipitously and putting upward pressure on oil prices. Conversely, some other analysts expect non-OPEC supply to increase by nearly 2 million barrels per day, far surpassing expected growth in world oil demand. Under this view of the global oil balance in 2007, OPEC would need to cut production to keep inventories from rising substantially and putting downward pressure on oil prices.

Time will tell which assessment of the call on OPEC crude oil over the coming year is correct. No one, nor any organization, including OPEC, the IEA, nor EIA can know for sure what 2007 will look like for oil markets. However, OPEC members’ own assessment of supply/demand balances over the coming year will likely have an important impact on the near-term oil price path. Any further OPEC production cuts now, based on concerns that non-OPEC supply growth will exceed demand growth next year, could put upward pressure on oil prices in today’s market.

Residential Heating Fuel Prices Stabilize Again

Residential heating oil prices increased minutely for the period ending December 11, 2006. The average residential heating oil price gained 0.2 cent last week to reach 244.4 cents per gallon, which was an increase of 3.0 cents from this time last year. Wholesale heating oil prices turned downward by 9.0 cents to reach 179.0 cents per gallon, an increase of 3.9 cents compared to the same period last year.

The average residential propane price increased 0.4 cent, to reach 197.8 cents per gallon. This was an increase of 2.2 cents compared to the 195.6 cents per gallon average for this same time last year. Wholesale propane prices decreased by 2.4 cents per gallon, from 108.9 to 106.5 cents per gallon. This was a decrease of 8.8 cents from the December 12, 2005 price of 115.3 cents per gallon.

Average Retail Gasoline Price Declines Slightly, While Diesel Increases

The U.S. average retail price for regular gasoline for December 11, 2006 fell 0.4 cent to 229.3 cents per gallon. Prices are 10.8 cents per gallon higher than at this time last year. East Coast prices were up 1.0 cent to 230.3 cents per gallon. In the Midwest, prices fell 3.7 cents to 222.4 cents per gallon. Gulf Coast prices were up 1.6 cents to 219.8 cents per gallon. Rocky Mountain prices were unchanged at 224.8 cents per gallon. The West Coast saw an increase of 1.1 cents to 249.6 cents per gallon, with California prices increasing by 0.8 cent, to 250.4 cents per gallon.

Retail diesel fuel prices continued their rise this week, with average nationwide prices increasing 0.3 cent to 262.1 cents per gallon, 18.5 cents more than at this time last year. Regionally, East Coast prices were unchanged at 261.0 cents per gallon. The Midwest price fell 1.5 cents to 256.3 cents per gallon. The Gulf Coast saw the average price go up 0.3 cent to 254.0 cents per gallon. Rocky Mountain prices rose 1.7 cents to 272.4 cents per gallon. Prices on the West Coast increased 7.1 cents to 293.1 cents per gallon, while prices in California were up 10.3 cents to 296.3 cents per gallon. California prices are 49.8 cents per gallon higher than at this time last year.

Propane Inventories Moderately Lower

The first week of December saw propane inventories move moderately lower by 2.0 million barrels to settle at an estimated 66.8 million barrels as of December 8, 2006, about 1.7 million barrels below the same level this time last year based on weekly data. The weekly stockdraw continues to show the Gulf Coast region accounting for most of the decline with inventories moving lower by 1.3 million barrels. However, despite the strong stockdraw on Gulf Coast inventories, the region’s inventories remain at the upper boundary of the average range for this time of year. Other regions posted mostly seasonal declines last week, with East Coast inventories showing a loss of 0.4 million barrels, while inventories in the Midwest posted a weekly decline of 0.3 million barrels. The combined Rocky Mountain/West Coast regions reported a 0.1-million-barrel drop during this same time. Propylene non-fuel use inventories remained unchanged at 3.5 million barrels last week, but accounted for a slightly higher 5.3 percent of total propane/propylene inventories from 5.0 percent reported during the prior week.

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