EIA Sees Oil Price Up Without OPEC Cut.

Keep crude oil output steady and prices will rise by 10% over the next six months. This is the latest oil market forecast from the US Energy Information Administration (EIA), released on Dec. 12, as OPEC ministers were preparing for their Abuja conference.

In its Short-Term Energy Outlook, EIA projects strong US oil demand this winter will push prices higher and draw down worrisome inventories, even if the OPEC does not fully implement already pledged cuts from Nov. 1. The EIA, the independent statistical wing of the Department of Energy, estimated November output or the 10 OPEC members - excluding Iraq, which is not part of OPEC's production quota structure - at 26.965m b/d, about 700,000 b/d above the 26.3m b/d output level promised by the group. Including Iraq, total OPEC output in the month was near 29m b/d, EIA data show.

In the latest projection, EIA estimates that prices will gain over the next six months, even if OPEC produces 29.1m b/d this quarter and in the first quarter of 2007, and inches up output to 29.3m b/d in the second quarter, when demand typically drops with the end of winter in the Northern hemisphere.

EIA's projections show that global oil demand is expected to drop by just 1.6m b/d in the second quarter of 2007 from the first quarter, about 25% smaller than the seasonal drop-off of 2.1m b/d a year earlier.

Global demand in the current quarter is expected to rise by 1.9% from a year ago, to 87.1m b/d, EIA projects, and average 86.5m b/d in the first quarter of 2007, up 1.7% from a year earlier. Demand in the US - the world's largest oil consumer - is expected to average 21.05m b/d in the current quarter, a 1.2% rise from a year ago, while first quarter 2007 demand will average 20.91m b/d, up 2.6% from a year ago.

US demand will be led by strong gasoline and distillate fuel demand - as a colder-than-a-year-ago winter pulls up heating oil use amid tightening stocks for both key products.

While Saudi Arabia - the world's top oil exporter - and others in OPEC express concern about the high level of oil stocks held by major consumer countries, latest data show US inventories are expected to continue declining at a record pace.

Saudi Oil Minister Na'imi has fretted that stockpiles appear to be about 100m barrels above the year-ago level in the major industrialised countries that make up the Organisation for Economic Co-operation and Development (OECD), apparently referring to data for the end of the third quarter. But the latest figures suggest that in the US alone, stocks will be down a huge 82m barrels at year-end from their end-September level.

US stocks account for about 40% of the OECD total. EIA's projections show a US stockdraw in the fourth quarter equal to about 890,000 b/d - more than 5.5 times the five-year average decline. That rapid descent, amid strong demand for refined products, would put year-end US commercial stocks at 1.017 bn barrels, the highest level since 2001. Earlier, preliminary EIA data put the stocks at the highest level since 1998 at the end of November.

EIA's forecast shows US crude oil stocks falling 12m barrels this month to end the year at 327.8m barrels. That would still be the highest level of end-year crude stocks since 1994. But EIA's projections show that by February 2007, total US oil inventories - and crude oil itself - would be below year-earlier levels.

Much of the forecast depends on winter weather, but the EIA warned that snug gasoline inventories amid expected record high demand also pointed to a tightening market.

US gasoline stocks currently are low relative to demand and are expected to stay tight through the winter and into next year's driving season, according to the EIA. End-year US gasoline stocks are expected to stand at 201.4m barrels, the lowest since 2000, equal to 22.2 days of demand in the first quarter projected at 9.06m b/d. That is down from 23.4 days a year ago.

At the start of the driving season, stocks will be "closer to the lower end of the range, suggesting tightness in gasoline markets for the remainder of this winter season and into next year's driving season", the EIA predicted

While the EIA said it expected distillate inventories to be adequate this winter, it saw levels at the end of March 2007 at about 7m barrels less than the year-ago level, though still in the middle of the normal range. In the fourth quarter, distillate demand is expected to be 4.38m b/d, up 5.3% from a year ago. First-quarter distillate demand is expected to be 3.5% above a year ago, at 4.47m b/d.

The EIA said: "Projections by the National Oceanic and Atmospheric Administration (NOAA) call for a fourth quarter 2006 that is 3% warmer than normal, but slightly colder than last year. NOAA's expectations for the first quarter [of] 2007 remain nearly 9% colder than one year ago. Assuming that NOAA's weather projections hold for the remainder of the winter, distillate consumption is expected to grow by 1.8% in 2007.

The IEA Projections: The Paris-based IEA held unchanged its forecast for world demand for oil in 2006 and 2007 in its monthly report on Dec. 13. The agency said it expected demand to grow by 1.1% to 84.5m b/d and by 1.7% in 2007 to 85.9m b/d. These figures were the same as those estimated last month. However, the IEA said that although it expected demand to grow next year, it judged that a slight slowing of growth was possible owing to uncertainty about the course of the US economy.

The IEA downgraded its forecast for the growth of demand in China this year to 5.6% from 6.2% because demand had eased in the last three months. It held its forecast for growth of Chinese demand next year at 5.4%. The slowing of the US economy would not necessarily result in a marked fall of demand for oil next year because demand was driven mainly by consumption of auto and aircraft fuel. In the short term, US consumers were likely to maintain their habits as heavy users of auto and airline travel, the report said.

The IEA noted that the price of WTI had fluctuated around 60/b in November and had risen slightly at the beginning of December owing to increased tension on the market. Reduced production by members of OPEC and a fall of US oil inventories had pushed prices upwards despite exceptionally mild weather, particularly in Europe.

Total production of crude oil had fallen by 50,000 b/d in November to 85.4m barrels per day, of which 28.9m b/d were produced by OPEC, a fall of 555,000 from the October figure. Within OPEC, the main reductions of output arose in Saudi Arabia, Iran, Iraq, the UAE and Venezuela. This had increased unused OPEC production capacity to 2.4m b/d.

Stocks of oil products held in the 30 countries belonging to the OECD, of which the IEA is an offshoot, fell by 40m barrels in October to 2.721 bn barrels or 33m barrels more than was held in stock 12 months ago. This was the equivalent of 54 days of demand.

The IEA said oil prices would remain high in coming months in an implicit warning to OPEC ministers to think twice before cutting production further on Dec. 14. The IEA was sending the message OPEC that oil prices were already set to be high during the winter in the Northern Hemisphere. The IEA said that "without doubt" the last production cut by OPEC, in November, would push up prices during the winter months when fuel is in heavy demand and against a background of risks for the world economy.

The IEA said in Germany and France demand for heating oil had risen for several months despite unusually mild weather because consumers had begun stocking in anticipation of rising prices, aggravated in Germany by an imminent increase in VAT sales tax.

However, the IEA said that a slight slowing of demand growth next year was possible owing to uncertainty about the course of the US economy. The report said: "There remain considerable uncertainties over the levels of both supply and demand over the coming months". Factors that were difficult to forecast covered the trend of world economic growth, production by Iraq and Nigeria, and the discipline shown by OPEC in applying its production quotas.

Referring to the last OPEC production cut, the agency said the outlook for the oil market in the months ahead offered "cold comfort for a risk-prone economy already facing another winter with high oil prices". It held its forecast for growth of Chinese demand next year at 5.4%.

On China, the IEA said: The fact that for the past three months demand appears subdued suggests that China may be drawing commercial stocks since there is no evidence that the underlying structural support of Chinese consumption - economic growth - is losing steam". It also noted that as a result of China's membership in the WTO, "the country is obliged in principle to open its crude and oil product wholesale markets to competition". New rules would take effect on Jan. 1. However, regulations were likely to favour incumbent operators and newcomers would probably opt to enter the market via joint ventures. "Therefore, change will arguably be slow in the Chinese domestic oil market", where Sinopec and PetroChina account for 90% of total imports".