EIA: Gasoline prices projected to decline through 2007

Gasoline prices at the pump are projected to continue to decline through the end of 2007 and then begin their seasonal increase next spring, according to the Aug. 7 Short-Term Energy Outlook issued by the Energy Information Administration (EIA). mp1

As of Aug. 6, retail motor gasoline prices have fallen by almost 40 cents per gallon from the spring peak of $3.22 per gallon on May 21, even as the price of West Texas Intermediate (WTI) crude oil has risen by over $9 per barrel (22 cents per gallon) over the same period, according to the Outlook. The exceptionally high refiner margins that were the result of numerous refinery problems earlier in the year have eased considerably, the EIA reported.

This summer’s motor gasoline consumption is projected to average 9.5 million bbl/d, up 1 percent from last summer’s average. Total domestic petroleum consumption is projected to average 20.9 million bbl/d in 2007, up 1.3 percent from the 2006 average. In 2008, consumption is projected to increase a further 1 percent, to an average of 21.1 million bbl/d.

In 2007, domestic crude oil production is projected to average 5.2 million bbl/d, up 0.7 percent from 2006 production levels. EIA’s projections assume a hurricane-related outage of about 12 million barrels for the Gulf of Mexico between now and the end of November. Domestic production is also projected to increase by 4.8 percent in 2008, averaging 5.4 million bbl/d. Contributing to the increases in output are the Atlantis deepwater platform, which is expected to come on-stream later this year, and the Thunderhorse platform, expected to come on-stream late in 2008.

Motor gasoline inventories during the first half of the summer (April-June) were tight and are expected to remain so during the rest of the season. At the end of July, total gasoline inventories were about 204 million barrels, 5 million barrels below the average of the previous 5 years. The low gasoline inventory situation is expected to persist, with end-of-season (September 30) stocks at 198 million barrels, 6 million barrels below the previous 5-year average and 17 million barrels below last year. Distillate inventories, which had held at relatively high levels since late 2005, quickly fell to the middle of the normal band in June. Distillate stocks are projected to remain near the previous 5-year average through this winter.

Crude oil prices, which have been rising over the last 2 months, are expected to reach a peak monthly average price in August before starting to ease slightly. In 2007, the RAC of crude oil is projected to be $64.86 per barrel compared to the $60.23 per barrel average in 2006. The main reason for this increase, the tight world oil supply and demand balance, is expected to continue next year, with a projected average 2008 RAC price of $68.75 per barrel. WTI prices, having averaged $66.02 per barrel in 2006, are projected to average $67.61 per barrel in 2007 and $71.25 in 2008.

This summer’s average retail regular motor gasoline price is projected to be $2.95 per gallon, up 11 cents per gallon from last summer. Despite the continuing low gasoline inventories, gasoline prices began to fall in the second half of July and are expected to continue to decline through the end of this year. Regular-grade gasoline prices are expected to average about $2.64 per gallon in December 2007, compared with an average monthly high of $3.15 in May 2007.

Retail heating oil prices are projected to average $2.85 per gallon during the coming heating season (October through March), compared to $2.48 last heating season. Rising crude oil prices and projections of lower distillate inventories going into the heating season, combined with the assumption of a colder winter than last year, are the reasons for the projected increase.

Among other highlights in the Aug. 7 Outlook:

The significant crude oil price increases of the last 2 months are the result of increasingly tighter world oil markets. In May, the refiner acquisition cost (RAC) for crude oil averaged $61.60 per barrel. By August, the average monthly RAC price is projected to be $73.50 per barrel.

The annual average RAC price is expected to increase from $60.23 per barrel in 2006 to $64.86 per barrel in 2007 and to $68.75 per barrel in 2008. West Texas Intermediate (WTI) crude oil prices are projected to average $67.60 per barrel for 2007 and $71.25 per barrel in 2008.

Here is an excerpt from the Outlook dealing with the global petroleum markets:

Continued production restraint by members of Organization of Petroleum Exporting Countries (OPEC), rising consumption, and moderate increases in non-OPEC supply are keeping oil prices firm. The global oil balance for the remainder of 2007 has tightened since the last Outlook due to lower projections for world oil production and a larger projected Organization for Economic Cooperation and Development (OECD) stock draw in the second half of the year. This situation contrasts with conditions last year, when prices weakened in the second half due to slow consumption growth, rising global inventories, and the absence of hurricane-related oil supply losses. EIA projections for 2008 also point to a tight market, with higher consumption growth in 2008 than in 2007, moderate growth in non-OPEC supply, increased demand for OPEC oil, and limited surplus production capacity, held mostly in Saudi Arabia. These tight conditions leave the market vulnerable to unexpected supply disruptions, especially as oil inventories are reduced over the coming months.

World oil consumption grew at a moderate rate of 0.7 million barrels per day (bbl/d) in the first half of 2007 compared with year-earlier levels and was slowed in part by warmer-than-expected weather in Europe and Asia. However, EIA projects that world oil consumption will grow at a year-over-year rate of 1.8 million bbl/d during the second half of 2007 in response to continued economic growth with most of the oil consumption growth expected to come from China, the United States, and the Middle East. Problems with the Kashiwazaki-Kariwa nuclear power plant are expected to increase oil consumption in Japan through mid-2008 by an estimated 150,000 bbl/d. At the same time, EIA lowered its projection for 2008 world oil consumption growth from the last Outlook by 0.1 million bbl/d, reflecting the impact of higher oil prices.

Non-OPEC production is projected to grow by about 690,000 bbl/d during 2007 compared with year earlier levels. In 2008, EIA estimates that non-OPEC production will rise by roughly 1.1 million bbl/d. Increased production in the former Soviet Union, the United States, and Brazil are expected to more than offset declining production in a number of countries, including Mexico, Norway, and the United Kingdom. The 2008 non-OPEC supply growth forecast is 100,000 bbl/d higher than in EIA’s previous Outlook, mostly due to higher growth projections for the United States (50,000 bbl/d) and Brazil (50,000 bbl/d).

Despite higher prices, OPEC officials have expressed a reluctance to raise production, pointing to high U.S. crude stocks and attributing high prices to refining bottlenecks, geopolitical tensions, and fund speculation. EIA’s projection for OPEC crude production in third quarter 2007 has been lowered by about 0.3 million bbl/d from last month’s Outlook to 30.5 million bbl/d. The change largely reflects an assumption that OPEC will delay increasing output from the third quarter of this year to the fourth quarter. Iraqi and Nigerian output have been constrained due to militant attacks, and at the end of July, shut-in production in Nigeria stood at 641,000 bb/d, about 127,000 bbl/d less than a month earlier. OPEC plans to meet on September 11 in Vienna to re-examine its output levels.

The low level of surplus OPEC oil production capacity, which is primarily in heavy crude oil, remains a key reason for the continued tight market conditions. Despite production restraint by OPEC since last fall, the level of OPEC surplus capacity in the second quarter 2007 stood at 2.4 million bbl/d, most of it in Saudi Arabia, Kuwait, and the United Arab Emirates. Low surplus capacity is expected to remain in 2008, as expected increased demand for OPEC oil more than offsets expected capacity gains in a few countries, continuing to leave the market vulnerable to unexpected supply disruptions. Further, the apparent unwillingness by OPEC to use available surplus capacity in the face of rising crude oil prices reduces any downward price impact that additional surplus capacity might have.

According to preliminary estimates, total OECD commercial inventories stood at 2.66 billion barrels at the end of June, near the seasonal average but down from the historically high levels seen last year. The shift in the market to backwardation (future prices are lower than current month prices) is a sign of a tight market and a disincentive to hold inventories, supporting an outlook for lower inventories in the months ahead. EIA projects that total third quarter OECD commercial inventories will experience a counter-seasonal 200,000 bbl/d stock drawdown, versus an average 290,000 bbl/d stock build experienced over the past 5 years. EIA projects that OECD commercial inventories (measured on a days-supply basis) will be in the low end of the 5-year range by the end of September. Even if OPEC raises output in the fourth quarter by roughly 0.5 million bbl/d (as we assume in our Outlook), inventories at year-end will be at the bottom of the 5-year range and remain there for the remainder of the forecast period.

The next Outlook is scheduled to be issued Sept. 11.