Global Crude Oil and Liquid Fuels Overview. Crude oil prices rose in June for the fourth consecutive month, in part because of stronger-than-anticipated global economic activity, primarily in Asia. Market sentiment continues to reflect expectations of an economic recovery and a future rebound in oil demand that are outweighing weak current oil consumption and high inventory levels. Continued production restraint by members of the Organization of the Petroleum Exporting Countries (OPEC) and unrest in Iran and Nigeria, respectively OPEC’s second- and seventh-biggest oil producers, are also supporting prices. The downside price risks of this forecast are a delayed or weaker-than-expected global economic recovery, ample global surplus production capacity, and high commercial inventories. Consumption. The global economic downturn curtailed world oil consumption during the second half of 2008 and the first half of 2009. Compared with the year prior, world oil consumption was down an average of 3.0 million barrels per day (bbl/d) from the fourth quarter of 2008 through the second quarter of 2009. However, the consumption decline rate is expected to moderate later this year because of comparison with a lower level of consumption last year and projected gradual global economic improvement. In particular, there has been stronger economic activity in Asia than was previously anticipated, and the current forecast reflects higher expected oil consumption in that region. As a result, a smaller decline in global oil consumption is expected in 2009, with oil consumption projected to fall by 1.6 million bbl/d compared with a decline of 1.7 million bbl/d in the June Outlook. Global consumption is projected to grow by 0.9 million bbl/d in 2010 in response to expected positive global economic growth (World Liquid Fuels Consumption Chart). Non-OPEC Supply. Total non-OPEC supply is expected to rise by 360,000 bbl/d in 2009 and to remain fairly flat in 2010. Over the forecast period, higher output from Brazil, the United States, Azerbaijan, and Kazakhstan is expected to offset falling production in Mexico, the North Sea, and Russia (Non-OPEC Crude Oil and Liquid Fuels Production Growth Chart). OPEC Supply. OPEC crude oil production is estimated to be 28.6 million bbl/d in the second quarter of 2009, down slightly from first quarter levels, but down 3.1 million bbl/d from the third quarter of 2008. OPEC crude output is expected to remain near current levels through the end of the year, then trend upward moderately in 2010 in response to higher demand. Substantial surplus production capacity, located mostly in Saudi Arabia, should help moderate upward price pressure until higher demand begins to erode the global supply cushion. Inventories. Preliminary data indicate that commercial inventories held by Organization for Economic Cooperation and Development (OECD) countries stood at 2.7 billion barrels at the end of the first quarter of 2009. At 60 days of forward cover, OECD commercial inventories were well above average levels at the end of March (Days of Supply of OECD Commercial Stocks Chart). Preliminary estimates suggest that OECD commercial inventories held fairly steady during the second quarter of 2009, rather than rising seasonally, but still remain well above the historic average. Crude oil in floating storage, which is not included in the OECD stock totals, has reportedly declined from a high of more than 120 million barrels at the beginning of 2009 to about 80 million barrels. U.S. Crude Oil and Liquid Fuels Consumption. Total consumption of liquid fuels and other petroleum products is projected to decrease by 650,000 bbl/d (3.3 percent) in 2009 (U.S. Petroleum Products Consumption Growth Chart), including a decline of 280,000 bbl/d (7.0 percent) in distillate fuel consumption and 140,000 bbl/d (8.7 percent) in jet fuel consumption. Motor gasoline consumption is projected to remain virtually flat as the significant price decline from last summer offsets some of the impact of the economic downturn. Modest economic recovery in 2010 is expected to contribute to a 310,000-bbl/d (1.6 percent) increase in total liquid fuels consumption. Production. Total domestic crude oil production averaged 4.96 million bbl/d in 2008, down from 5.06 million bbl/d in 2007 (U.S. Crude Oil Production Chart). Production is expected to increase to an average of 5.23 million bbl/d in 2009 and 5.36 million bbl/d in 2010. Oil production from the new Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields is expected to account for about 14 percent of Lower-48 crude oil production by the fourth quarter of 2010. Regular-grade motor gasoline retail prices, which averaged $3.26 per gallon in 2008, are expected to average $2.36 per gallon this year. Higher projected crude oil prices in 2010 ($12 per barrel higher on average, or 29 cents per gallon) are expected to boost average motor gasoline prices to $2.69 per gallon next year. Diesel fuel retail prices, which averaged $3.80 per gallon in 2008, are projected to average $2.46 per gallon in 2009 and $2.79 in 2010. Consumption. Total natural gas consumption is projected to decline by 2.3 percent in 2009 and remain unchanged in 2010 (Total U.S. Natural Gas Consumption Growth Chart). Poor economic conditions are expected to prolong the current slump in natural gas demand over the coming months, led by an 8.2-percent drop among industrial users in 2009. While consumption is expected to fall in the residential and commercial sectors as well this year, competitive natural gas prices relative to coal are projected to lead to a 2.4-percent increase in electric power sector consumption in 2009. Slight consumption increases in the residential, commercial, and industrial sectors next year are expected to result from the projected economic recovery. Natural gas consumption in the electric power sector is expected to decline by 1 percent in 2010 as natural gas prices rise and coal regains a larger share of the baseload generation mix. Production and Imports. Total U.S. marketed natural gas production is expected to decline by 0.6 percent in 2009 and by 2.9 percent in 2010. As both consumption and prices have waned amid the recent economic downturn, natural gas producers have responded with a dramatic reduction in drilling activities. According to Baker Hughes, total working natural gas rigs are now down 57 percent since September 2008. The resulting production decline from the drop in rigs is expected to occur almost exclusively in the Lower-48 non-Gulf of Mexico (GOM) region during the second half of this year. While the drop in natural gas drilling rigs is expected to result in lower natural gas production in 2010, recent improvements in drilling technology have lowered costs, reduced drilling time, and increased well productivity. These factors should improve the responsiveness of producers to changes in demand, limiting the extent of sustained upward price movements through the forecast period. U.S. liquefied natural gas (LNG) imports are expected to increase to about 506 billion cubic feet (Bcf) in 2009 from 352 Bcf in 2008, because of a combination of weak demand and growing supply in the global LNG market. Lower demand for LNG in Japan and South Korea has increased the amount of available LNG in the global market, leading to larger LNG purchases in China and Europe. However, with limited natural gas storage capacity in Asia and Europe, lower global demand is expected to increase available LNG cargoes for import by the United States. Inventories. On June 26, 2009, working natural gas in storage was 2,721 Bcf (U.S. Working Natural Gas in Storage Chart). Current inventories are now 467 Bcf above the 5-year average (2003–2007) and 615 Bcf above the level during the corresponding week last year. Through the first 3 months of the injection season (March 27 through June 26) the estimated inventory build was 1,067 Bcf, the largest increase for this period since 2001, and 157 Bcf more than the average build during this period since 2001. Working natural gas stocks are now expected to reach 3,670 Bcf at the end of the 2009 injection season (October 31), about 105 Bcf above the previous record of 3,565 Bcf reported for the end of October 2007. Prices. The Henry Hub spot price averaged $3.91 per Mcf in June, which was 5 cents below the average spot price in May. Prices continue to reflect the disparity between weak demand and strong supply. Despite low prices, natural gas marketed production in the Lower-48 non-GOM increased by 1.9 Bcf/d (3.7 percent) on a year-over-year basis in April, the most current available monthly data. Although U.S. natural gas production is projected to decline over the coming months, historically high storage levels and limits to storage capacity may cause prices to decline further this fall. Prices are expected to recover in early 2010 as the market balance tightens. However, rising prices are expected to be tempered by improvements in the productive capacity of domestic onshore supply sources throughout the forecast period. The Henry Hub spot price is expected to average $4.22 per Mcf in 2009 and $5.93 per Mcf in 2010. Consumption. Retail sales of electricity in the industrial sector continue to decline, having fallen by 12 percent during the first quarter of 2009 compared with year-ago levels. Total consumption of electricity is projected to fall by 2.0 percent for the entire year of 2009 and then rise by 0.8 percent in 2010 (U.S. Total Electricity Consumption Chart). Prices. Residential electricity prices rose by 8 percent during the first quarter of 2009 compared with the first quarter of 2008 (U.S. Residential Electricity Prices Chart). Lower generation fuel costs are expected to be passed through to retail consumers later this year, keeping the annual average growth in prices at around 4.7 percent and 3.3 percent in 2009 and 2010, respectively. Consumption. The projected electric-power-sector consumption of about 990 million short tons of coal in 2009 would be the first time since 2002 that annual consumption would be below the billion-short-ton level. The 5.2-percent decline in coal consumption in the electric power sector is the result of lower total electricity generation coupled with projected increases from other generating sources, including natural gas, nuclear, hydroelectric, and wind. Coal consumption in the electric power sector is expected to increase by 1.6 percent in 2010 as natural gas prices rise and coal regains a larger share of the baseload generation mix. Coal consumption for both steam and coke production is projected to decline by 29 percent in 2009, reflecting very weak industrial activity (U.S. Coal Consumption Growth Chart). Production. Coal production is expected to fall by about 8 percent in 2009 in response to lower domestic coal consumption, fewer exports, and higher coal inventories. The May 2009 production estimate is the lowest monthly coal production figure since December 2000. Production is projected to increase slightly (0.5 percent) in 2010 as domestic consumption and exports increase with an improving economy (U.S. Annual Coal Production Chart). Prices. Despite declines in electricity demand, decreases in spot coal prices, and lower costs for other fossil fuels, the average delivered electric-power-sector coal price is projected to increase from an average of $2.07 per million Btu in 2008 to $2.15 per million Btu in 2009. A significant portion of power-sector coal contracts were entered into during a period of high prices for all fuels. Although record increases in spot prices last year (some well over 100 percent) for several types of coal contributed to the increase in the cost of coal, spot market purchases make up only a small portion of coal consumed in the power sector. The average delivered power-sector coal price is expected to decline to $2.02 per million Btu in 2010 as expiring high-priced contracts are replaced.
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