EIA: Gasoline likely to stay above $3 per gallon for the summer

The Energy Information Administration released its Short-Term Energy Outlook on June 12. mp1

Here are highlights:

- After rising to a weekly record-level nominal price of $3.22 per gallon on May 21, retail regular motor gasoline prices have started to recede as refinery problems are addressed and gasoline imports increase.

- Strong demand for gasoline combined with low gasoline inventories and crude oil prices that are expected to average over $65 per barrel for West Texas Intermediate (WTI) are likely to keep gasoline prices over $3 per gallon throughout the summer months.

- Retail regular grade motor gasoline prices are projected to average $3.05 per gallon this summer compared with the $2.84 per gallon average of last summer. The May average monthly gasoline pump price reached $3.15 per gallon and is expected to fall in June and July, then rise again in August to $3.11 per gallon.

The EIA Outlook further noted that the National Oceanic and Atmospheric Administration (NOAA) has forecast an active hurricane season again this year with 13 to 17 named storms forming in the Atlantic basin, including 7 to 10 hurricanes. The Outlook includes hurricane-induced production outages of 13 million barrels of crude oil and 86 billion cubic feet of natural gas, primarily occurring in August and September.

Here are excerpts of the Outlook, slightly edited:

U.S. Petroleum Markets
Total petroleum consumption averaged 20.8 million bbl/d during the first quarter of 2007, up 1.9 percent from the first quarter of 2006. For 2007 as a whole, total petroleum consumption is projected to average 20.9 million bbl/d, up 1.5 percent from the 2006 average. In 2008, total petroleum consumption growth is projected to slow to 1.1 percent. In both years, motor gasoline consumption is projected to increase by an average of about 1.1 percent per year.

In 2007, domestic crude oil production is projected to average 5.10 million bbl/d, down from 5.14 million bbl/d in 2006. EIA’s projection of domestic crude oil production includes a hurricane-induced outage of 13 million barrels for the Gulf of Mexico. The total outage occurs over five months (June through October) with the shares distributed by the average historical outage for each month (June 1.7 percent; July 4.3 percent; August 32.8 percent; September 52.7 percent; and October 7.7 percent). With the startup of new deep-water production from the Atlantis platform later this year and from the Thunderhorse platform late in 2008, domestic crude oil production is projected to average 5.33 million bbl/d in 2008.

 Motor gasoline inventories are projected to be tight during the summer season. These inventories, which normally increase in April, declined instead as a result of refinery maintenance problems and low imports, based on preliminary data. Total gasoline stocks increased by 8.2 million barrels in May to an estimated 201.5 million barrels, but that was still 13 million barrels less than at the end of May 2006. The inventory situation is likely to keep gasoline prices high, resulting in higher refinery profit margins than those seen last summer.

The refiner average acquisition price of crude oil is projected to average about $60 per barrel in both 2007 and 2008, the same as in 2006. WTI prices, on the other hand, are projected to average $64 per barrel in 2007, down from $66 in 2006. In 2008, the WTI price is projected to average almost $65 per barrel, reflecting continued market tightness and uncertainties. During the summer season (April—September), regular grade motor gasoline prices are projected to average $3.05 per gallon, up 21 cents per gallon from last summer.

Global Petroleum Markets
Commercial inventories have dropped considerably since the end of September, reflecting strong oil demand growth, production cuts by members of the Organization of Petroleum Exporting Countries (OPEC) and only modest increases in non-OPEC production - all of which contribute to tight global crude oil markets. So far, OPEC members have not committed to raising output - perhaps, waiting for a further reduction in Organization for Economic Cooperation and Development (OECD) inventories cover before acting, according to the EIA Outlook.

Uncertainty about OPEC members’ plans to increase output as well as ongoing geopolitical concerns, including the loss of Nigerian production, have left crude markets vulnerable to continued supply risks and volatility over the coming months.

World oil consumption is projected to grow by 1.4 million barrels per day (bbl/d) in 2007 and by 1.6 million bbl/d in 2008. European consumption for first quarter 2007 has been revised slightly downwards by 200,000 bbl/d due to warmer-than-normal weather at the start of the year. EIA has raised oil consumption growth in China based upon continued strong economic growth projections. The United States, China and the Middle East are major contributors to the increase in oil consumption, accounting for more than 2/3 over this period.

Non-OPEC production is projected to grow by about 600,000 bbl/d in 2007 and by 900,000 bbl/d in 2008 - roughly half the expected growth in consumption. EIA’s 2007 projections for non-OPEC supply have been lowered by 150,000 bbl/d from last month’s Outlook, reflecting expectations that some U.S. Gulf of Mexico production will be affected by hurricanes and lower-than-expected first quarter 2007 actual production data and continued project delays in Africa and Central and South America.

From the fourth quarter of 2006 to the first quarter of 2007, crude oil production by the OPEC 11 members (which excludes Angola) fell by 600,000 bbl/d, as OPEC attempted to reduce the buildup in global oil stocks. Preliminary second quarter data indicates that OPEC kept production fairly flat compared with the first quarter. The violence-induced loss of over 700,000 bbl/d of Nigerian crude production impacts global markets by reducing the availability of light sweet crude for producing gasoline. Angola, which is not subject to OPEC production quotas, is expected to increase production by over 300,000 bbl/d in 2007 and again in 2008. In upcoming months, rising oil demand is expected to outpace growth in non-OPEC supply, and EIA is assuming that OPEC 11 should increase production by over one million bbl/d to maintain normal inventory levels. If OPEC production does not increase and inventory levels decline, upward price pressures could result.

The combination of OPEC members’ production cuts and rising consumption has been causing OECD commercial inventories to fall from their high historical levels of last fall. Preliminary OECD data indicate a draw of 800,000 bbl/d in the first quarter (compared with an average inventory draw of 300,000 bbl/d for that quarter over the past five years), pushing inventories down toward the middle of the normal range at the end of the first quarter.

EIA’s supply and consumption estimates for the second quarter suggest OECD inventories on a days-of-supply basis will continue to decline to the low end of the five-year average range. If OPEC does not increase production, inventory levels could fall below the five-year average, with the attendant price effects.