# Presentation: 497471

## Oil Markets After the Hurricanes:Reversion to the Mean or Return to Recent Trend?

**Reversion to the Mean or **
**Return to Recent Trend?**

**John Cook, Director**
**EIA Petroleum Division**
**December 14, 2005**

**Macroeconomic Advisers**
**Quarterly Meeting**
**December 2005**

- Map courtesy of iMapData Inc.

- Oil Markets After the Hurricanes**:****Reversion to the **Mean** or ****Return to Recent Trend?**

## WTI Crude Oil Price: 1998-2006

**WTI Crude Oil Price: 1998-2006**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, December 2005. **

## Weighing the Market

**Bulls**
**Continued strong economic and oil demand growth worldwide**
**Little spare capacity available**
**Relatively low forward cover**
**Lingering hurricane supply losses**
**Other possible supply disruptions**
**Geopolitical concerns**
**Weather**

**Bears**
**Slowing economic and oil demand growth**
**Demand destruction due to high prices**
**Inventory recovery**
**More capacity growth**
**Warm winter potential**
**Easing supply risks**

## WTI Futures Curves:  The Deferred Price Has Also Increased in Recent Years

**WTI Futures Curves:  The Deferred Price Has Also Increased in Recent Years**

**Source: New York Mercantile Exchange. **

**12/2/2002**

**12/1/2003**

**12/1/2004**

**12/1/2005**

**8/30/2005**

**Katrina**

## World Oil Demand Growth Is Expected To Pick Up Again in 2006

***World oil demand growth slowed in 2005 but will increase in 2006***

**Source: History:  EIA;  Projections: Short-Term Energy Outlook, December 2005.**

## Estimates of World Demand Growth Have Been Continually Too Pessimistic in Recent Years

**Sources: December editions of IEA’s *****Oil Market Report*****.**

**Estimate 1 Year Ahead**

**Estimate End of Current Year**

**?**

## Estimates of Non-OPEC Supply Growth Have Been Continually Too Optimistic in Recent Years

**Sources: December editions of IEA’s *****Oil Market Report*****.**

**Estimate 1 Year Ahead**

**Estimate End of Current Year**

**?**

## Recent Non-OPEC Supply Growth Is Mostly from Former Soviet Union (FSU) Countries

**Source: EIA international petroleum statistics and***** Short-Term Energy Outlook, December 2005*****.**

## Hurricanes Katrina and Rita Shut In Significant Gulf Crude Oil Production

**Hurricanes Katrina and Rita Shut In ****Significant Gulf Crude Oil Production**

**Wilma**

**Ivan**

**‘****000 bbl/d**

**Rita**

**Katrina**

**Source: Short Term Energy Outlook, December 2005. **

**Notes:**
Second, the impact of the hurricanes on top of already tight global oil markets are contributing to higher prices this winter.
While the hurricanes, particularly Rita, significantly impacted crude oil production in the Federal Gulf of Mexico, crude oil prices increases have been modest and temporary.  Sales and loans of crude oil from the nation’s Strategic Petroleum Reserve served to allay crude supply concerns.  
While oil product prices rose in response to product shortages, the loss of operable refining capacity from Rita, which is discussed in the next slide, also reduced the demand for crude oil, helping to moderate WTI prices. 
Crude oil production is now recovering.  However, by early this week, the amount of shut-in Federal Gulf of Mexico crude production was still nearly 510 thousand barrels of oil per day, about 30 percent of pre-hurricane production. 
EIA’s baseline projections in this Outlook reflect a scenario of continued recovery of energy infrastructure in the Gulf region through year-end.  By March, crude production shut-in in our scenario averages about 19 percent of pre-hurricane Federal GOM production (5 percent of total U.S. production). 

## Hurricanes Katrina and Rita Shut In Significant Gulf Natural Gas Production

**Hurricanes Katrina and Rita Shut In ****Significant Gulf Natural Gas Production**

**Shut In Capacity**

**Ivan**

**Bcf/d**

**Source: Short Term Energy Outlook, December 2005. **

## Will OPEC Keep Markets Adequately Supplied?

**History**

**Projections**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, December 2005.**

## OECD Total Commercial Oil Stocks Near Average Levels This Year

**OECD Total Commercial Oil Stocks Near Average Levels This Year**

**Source:  International Energy Agency database, November 2005.**

## But OECD Total Commercial Oil Stocks Low in Terms of Days Supply

**But OECD Total Commercial Oil Stocks Low in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## Regionally, OECD Atlantic Basin Commercial Oil Stocks Are Low in Terms of Days Supply

**Regionally, OECD Atlantic Basin Commercial Oil Stocks Are Low in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## And OECD Pacific Commercial Oil StocksAre Very Low in Terms of Days Supply

**And OECD Pacific Commercial Oil Stocks****Are Very Low in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## OECD Total Commercial Petroleum Product  Stocks Are Low in Absolute Levels

**OECD Total Commercial Petroleum Product  Stocks Are Low in Absolute Levels**

**Source:  International Energy Agency database, November 2005.**

## OECD Total Commercial Petroleum Product Stocks Are Particularly Low in Terms of Days Supply

**OECD Total Commercial Petroleum Product Stocks Are Particularly Low in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## As Spare Capacity Increases in 2006, OECD Days Supply Will Continue to Fall

**As Spare Capacity Increases in 2006, OECD Days Supply Will Continue to Fall**

**Sources: WTI:  Reuters; OECD Days Supply:  International Energy Agency;  World Excess Production Capacity:  U.S. Energy Information Administration estimates. **

## U.S. Refining Capacity Surplus Disappearing, Creating Short-Term Challenge

**Gross Inputs**

**Operable Capacity**

**Source: U.S. Energy Information Administration.**

## Capacity Surplus Varies Seasonally

**Gross Inputs**

**Operable Capacity**

**Seasonal Squeezes**

**Source: U.S. Energy Information Administration.**

## Seasonal Crude Use Down In Fall Worldwide

**Source:  BP World Statistics 2005.**

## Hurricanes Katrina and Rita Initially ShutDown Most Gulf Refinery Capacity

**Hurricanes Katrina and Rita Initially Shut****Down Most Gulf Refinery Capacity**

**Shut In Capacity**

**‘****000 bbl/d**

**Source: Short Term Energy Outlook, December 2005. **

## Hurricane Outages Lowered Available Short-Term U.S. Refinery Capacity

**Source: U.S. Energy Information Administration.**

## Initially, Other Regions Help Balance U.S Losses

**Source:  International Energy Agency database, November 2005 and EIA’s ****Short Term Energy Outlook, December 2005****.**

## Product Imports Were Key Supply Source During September Through November

**Product Imports Were Key Supply Source During September Through November**

**2004**

**2005**

**Source: U.S. Energy Information Administration.**

## U.S. Four-Week Average Finished Gasoline Demand Begins to Show More Typical Growth

**Source: EIA *****Weekly Petroleum Status Report*****.**

## U.S.  Four-Week Average Diesel Demand Has Returned to Pre-Hurricane Growth

**Source: EIA *****Weekly Petroleum Status Report*****.**

## Chinese Oil Demand Begins to Show Growth Again in Second Half of 2005

**Source:  International Energy Agency database, November 2005.**

## Much of China’s Oil Demand Growth in Last 2 Years Has Come From Gasoline and Diesel

**Source:  BP World Statistics 2005 and industry estimates.**

## OECD Atlantic Basin Commercial Gasoline Stocks Well Below Average in Terms of Days Supply

**OECD Atlantic Basin Commercial Gasoline Stocks Well Below Average in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## OECD Atlantic Basin Commercial Distillate StocksAlso Low in Terms of Days Supply

**OECD Atlantic Basin Commercial Distillate Stocks****Also Low in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## OECD Pacific Commercial Distillate StocksLow in Terms of Days Supply

**OECD Pacific Commercial Distillate Stocks****Low in Terms of Days Supply**

**Source:  International Energy Agency database, November 2005.**

## U.S. Diesel Inventories Have Been Low in Terms of Days Supply for the Last 2 Years

**U.S. Diesel Inventories Have Been Low in Terms of Days Supply for the Last 2 Years**

**Source:  U.S. Energy Information Administration.**

## Conclusions

**U.S. oil demand, while temporarily affected by the hurricanes, is returning to pre-hurricane growth rates.**
**World oil demand growth is expected to be stronger in 2006 than 2005.**
**Non-OPEC oil supply is expected to grow by less than world demand in both 2005 and 2006.**
**This will require either:**
**More OPEC production, limiting any large increase in spare production capacity, or**
**Inventories will be drawn down, keeping them low on a days supply basis.**** **
**Thus, oil markets are expected to remain tight in 2006.**