Gabriel M Key  

The global oil market remains fundamentally tight entering the second quarter, despite a slowdown in U.S. oil consumption and growing risks to global economic growth.  The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices.  The flow of investment money into commodities has contributed to crude oil price volatility.  Inventories are improving in the Organization for Economic Cooperation and Development (OECD) countries, but given the lack of surplus capacity and geopolitical concerns in Nigeria, Venezuela, and Iraq, a higher level of commercial inventories is desirable.  The magnitude, breadth, and duration of any global economic slowdown will certainly influence market conditions over the near term.  The increase in non-Organization of the Petroleum Exporting Countries (OPEC) production in the second half of the year, however, is expected to contribute to increases in OPEC surplus crude oil production capacity and ease upward price pressures toward the end of the year (discussed further below).

Consumption. World oil consumption is expected to grow by 1.2 million bbl/d in 2008.  Non-OECD countries are expected to account for over 1 million bbl/d of world consumption growth, while OECD consumption is expected to climb by 90,000 bbl/d.  Higher oil prices and slower economic growth have dampened consumption in the United States, but available partial data indicate global oil consumption is still increasing because of continued growth in China, India, Russia, and the Middle East oil-exporting countries.  In March, China's oil majors were reportedly rationing diesel fuel in parts of the country (World Oil Consumption).

Non-OPEC Supply. Growth in non-OPEC supply is projected to be 0.6 million bbl/d in 2008, lower than last month’s assessment, because of revisions to recent historical data and delays in new oil projects.  Brazil, Azerbaijan, and Sudan are expected to account for most of the net additions to capacity, while the United Kingdom, Mexico, and Norway are among countries expected to experience declines (Non-OPEC Oil Production Growth).  The bulk of the supply growth is weighted toward the second half of the year, with non-OPEC supply growth projected to rise by 1.1 million bbl/d in the second half of 2008 (compared with year-earlier levels), versus growth of 80,000 bbl/d in the first half of the year. Given recent history, EIA recognizes that the pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects, thus, production increases could be less than the current forecast.

OPEC Supply. OPEC crude oil production is expected to average 32.3 million bbl/d during the first quarter of 2008, or about 700,000 bbl/d above fourth quarter 2007 levels.  The increase since the end of 2007 mainly reflects higher production from Saudi Arabia, Angola, and the United Arab Emirates.  Based on EIA projections of consumption and non-OPEC supply, OPEC crude oil production is expected to increase during the summer and then dip in the second half of the year.  If consumption rises more slowly than expected and OECD inventories climb substantially relative to historic levels, OPEC members would likely consider holding their output below the projected level.  Based on country capacity expansion plans and projected production, EIA expects that OPEC surplus production capacity will increase slightly in 2008 but remain concentrated in Saudi Arabia (OPEC Surplus Oil Production Capacity).

Inventories. OECD commercial inventories stood at 2.58 billion barrels at the end of 2007, 53 million barrels higher than reported in the lastOutlook due to revised historic data.  The improved stock situation mostly reflects lower-than-expected fourth quarter oil consumption in OECD Europe and Asia.  In the first quarter of 2008, OECD commercial inventories are expected to decline only slightly, in contrast to an average 400,000 bbl/d draw over the past 5 years.  Total U.S. inventories, which represent about 40 percent of total OECD stocks, rose by 1 million barrels during the first quarter, compared with an average decline of 26 million barrels over the same period during the previous 5 years.  The normal seasonal decline in U.S. stocks was held in check by the weak U.S. gasoline market, with gasoline inventories increasing by 9 million barrels during the first quarter compared with the previous 5-year average decline of 6 million barrels.  As a result, OECD commercial stocks could enter the summer almost 50 million barrels above the 5-year average.  If expected oil production and consumption levels in the second half of 2008 materialize, total OECD commercial inventories should remain above the 5-year average for the rest of the year (Days of Supply of OECD Commercial Stocks).