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US, world face lower oil demand growth to June: EIA

Posted on: Tuesday, 7 March 2006, 15:13 CST

By Tom Doggett

WASHINGTON (Reuters) - U.S. and world oil demand will be lower than expected through June as petroleum prices stay high, the government's top energy forecasting agency said on Tuesday.

The projections of lower demand, particularly for the second quarter, come as OPEC ministers meet in Vienna this week to review their production policies and could justify concerns of some cartel members that output needs to be cut at some point in the coming months to prevent a drop in crude prices.

The U.S. Energy Information Administration revised down its forecast for global oil demand growth by 100,000 barrels per day (bpd) for both the current quarter and the second quarter, with consumption averaging 84.9 million bpd and 83.7 million bpd, respectively,

The United States, which is the world's largest oil user and OPEC's biggest customer, accounts for much of that reduction due to an expected drop in residual fuel demand.

The EIA now sees the growth in U.S. oil demand down 40,000 bpd for the January-March period and down 90,000 bpd over Apil-June.

The slowdown in the second quarter reflects expected shutdowns of U.S. refineries for routine maintenance, which will cut crude runs and the production of residual fuel, which is the last product made from a barrel of oil and used by ships for fuel, according to EIA analyst Tancred Lidderdale.

"With the higher (refinery) turnaround schedule, the lower crude runs we have in the forecast, that essentially reduces that residual fuel oil supply," he said.

As a result, ships will get their fuel in overseas ports where more residual supplies are available, moving demand out of the United States, he said.

Total U.S. oil demand should average 20.63 million bpd in the first quarter and 20.82 million in the second quarter, the EIA said.

So while global oil demand will be lower in the second quarter compared to the first quarter, which is normal, demand in the United States will be unusually higher in the second quarter than in the current quarter.

That's because record warm U.S. temperatures in January slashed demand for heating fuels in the first quarter. "It's the weather effect," Lidderdale said.

Energy prices are forecast to stay high, which could also account for some of the dampening in demand growth.

U.S. crude oil prices are expected to average $64 a barrel this year and $61 in 2007, the EIA said.

The retail gasoline price, which this week averaged $2.33 a gallon, is forecast to rise above $2.50 during the early summer months, the agency said.

The price for a gallon of regular unleaded gasoline should average $2.42 this year, up 15 cents from last year, and then average $2.36 in 2007, the EIA said.

Even though global demand will be lower than previously forecast, OPEC ministers are expected to decide to keep oil production steady at this week's meeting, finding it difficult to justify an output cut with petroleum prices so high.

The oil minister for OPEC member Kuwait said on Tuesday he thinks the cartel "truly believes that there will be oversupply in the market in the next quarter but because of the price factor and because of the geopolitical factors we believe we will continue to maintain the current production."

The drop in demand will help build U.S. petroleum inventories. The EIA said gasoline stocks, which are at the highest level in almost seven years, will be 9 million barrels higher than it previously forecast for the end of March and should reach 215 million barrels.

While high petroleum inventories would usually keep prices low, this is not the case at the moment, because refiners are keeping those stocks in reserve as a cushion against possible supply disruptions due to new U.S. fuel specifications and geopolitical tensions in OPEC countries like Saudi Arabia, Venezuela, Nigeria, Iran and Iraq, Lidderdale said.

"Those high (U.S.) inventories may not necessarily be available for sale...if you've got a situation of supply uncertainty," he said.

Source: REUTERS

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