EIA forecasts modest growth in world oil demand in 2001

Agency says it remains an open question as to whether or not natural gas spot prices are likely to remain at or above $3

Petroleum News Alaska

The Department of Energy’s Energy Information Administration said Aug. 8 that prospects for growth in world petroleum demand this year may not be as dim as some would suggest. Except during periods of serious international financial distress (1998), rapid increases in oil prices (1991 and 2000), and the dissolving of a nation-state (i.e., the former Soviet Union in the early 1990’s), world demand has generally grown by 1-2 million barrels per day over the last decade.

The EIA said in its August short-term energy forecast that it expects world demand growth in 2001 to be very close to the lower end of that 1-2 million barrels per day range.

While economic factors that tend to support oil demand growth are somewhat weaker than normal this year (the EIA expects world GDP growth to be about 2 percent in 2001 compared to an average of almost 3 percent for the period 1991 to 2000), there have been weaker economic scenarios in the last decade, the agency said.

Since oil prices are likely to show a decline of 7-10 percent this year, in contrast to the average annual increase of about 50 percent in 1999 and 2000, continued weakness in world oil demand growth such as that seen in 2000 seems unlikely. For the first half of the year, preliminary estimates indicate year-over-year growth of about 1.2-1.3 million barrels per day. Even allowing for substantially lower growth rates in the second half of 2001, annual demand growth averaging near 1 million barrels per day is likely.

Gas prices above $3 questionable

It remains an open question as to whether or not natural gas spot prices are likely to remain at or above $3 per thousand cubic feet for any sustained period of time for the rest of 2001 and for the off-season in 2002, the EIA said. If gains in production capability prove to be sluggish, then the promise of significant gains in demand next winter (bolstered by prospects for an improving economy and relatively high oil prices) may contribute to price support at or above current levels.

The EIA said that spot prices at the Henry Hub averaged $3.25 per thousand cubic feet during the first week of August.

The agency said that if production capability is growing sharply now, far more than a seasonal recovery in demand may be needed to preserve gas prices above $3 per thousand cubic feet. Year-to-date data on demand and supply does not provide clear indications of which scenario is most likely.

The emerging balance from the data and estimates the EIA has for the first half of the year suggest that either demand is being overstated to some extent or production is being understated.

The agency said that the former condition supports (at least in theory) the notion that a significant revival in demand may impinge upon capacity limits and maintain prices above $3, while the latter condition suggests the possibility that foreseeable demand increases may be insufficient to tighten or even maintain marginal acquisition costs over the next one to two years.

In either case, the EIA said, continued above-normal injections of gas into storage — at the end of July U.S. underground storage was 340 billion cubic feet above last year’s level and 9 percent above the five-year average — are likely to keep pressure on near-term prices and lessen the likelihood of significant increases in prices in the 2001-2002 heating season.