December 9 Release

Overview. The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices. World real gross domestic product (GDP) growth is projected to slow from about 4 percent in 2006 and 2007 to about 2.7 percent this year and 0.5 percent in 2009. Last month’s Outlook assumed world GDP would increase by 1.8 percent in 2009. The condition of the global economy and production decisions by members of the Organization of Petroleum Exporting Countries (OPEC) are expected to remain the crucial factors driving world oil prices.

Consumption. The status of the global economy has become the most important driver of oil consumption growth and EIA’s oil consumption projections continue to be revised downward in response to lower forecasts for global economic growth. As a result, global oil consumption is expected to decline by 50,000 bbl/d in 2008 and by 450,000 bbl/d in 2009, which would mark the first time in 3 decades that world consumption would decline in 2 consecutive years. In both years, growth is concentrated in countries outside of the Organization for Economic Cooperation and Development (OECD), especially China, the Middle East, and Latin America. However, projected sharp declines in oil consumption in OECD countries more than offset any non-OECD oil consumption growth (World Oil Consumption). If the world economy recovers sooner or is stronger than EIA now anticipates, oil consumption could decline at a slower rate or potentially increase instead, putting upward pressure on oil prices.

Non-OPEC Supply. Non-OPEC supply is expected to decline by 310,000 bbl/d in 2008, reflecting a combination of factors that include large supply disruptions in Central Asia and the Gulf of Mexico and project delays. Although declines in many non-OPEC basins, especially Mexico, the North Sea and Russia, are expected to continue in 2009, EIA projects that total non-OPEC supply will grow by 410,000 bbl/d in 2009, with the largest sources of growth coming from Azerbaijan, Brazil and the United States.
The global economic slowdown and falling oil prices bring additional risk to the usual uncertainties (unexpected disruptions, project delays, underestimation of decline rates) concerning non-OPEC supply growth. Lower oil prices bring into doubt the viability of some high-cost non-OPEC projects, especially those utilizing nonconventional technology or those seeking to exploit frontier oil basins. The credit crunch associated with the global economic crisis can also make it difficult for oil companies to acquire financing for new projects. If problems in global financial markets lead to delayed investment in existing and new oil fields, then even a short-lived economic downturn could have longer-term ramifications for world oil supply. This would heighten the risk of a return to a tight supply situation once the world economy and oil demand growth recover.

OPEC Supply. OPEC is scheduled to meet on December 17 to evaluate the effectiveness of its earlier decisions to cut production targets by 1.5 million bbl/d and to weigh the need for additional production cuts. Although the extent of OPEC members’ compliance with the last production cut is still uncertain, EIA believes that the continued weak market conditions will prompt higher-than-usual compliance among OPEC members. It remains unclear whether production cuts so far are enough to avoid a counter-seasonal inventory build in the fourth quarter of 2008, a build that would add to downward price pressure over the winter. The position of some OPEC members at the upcoming meeting may be influenced by a desire to avoid excessive production cuts that might further tighten the market and trigger a sharp price rebound that could hurt the world economy.

EIA projects that OPEC crude production will fall from 32.6 million bbl/d in the third quarter of 2008 to 30.6 million bbl/d in the first quarter of 2009. OPEC crude production is expected to average 30.6 million bbl/d in 2009, about 1.6 million bbl/d below 2008 levels. The combination of lower demand for OPEC oil and capacity expansions expected in several OPEC countries would lead to a rise of surplus production capacity to an average of 4 million bbl/d in 2009 (OPEC Surplus Oil Production Capacity). In addition, EIA expects that OPEC production of non-crude liquids will rise substantially next year, growing by 770,000 bbl/d in 2009. Our price forecast for 2009 reflects both of these factors.

Inventories. Revised data indicate that OECD commercial inventories rose by 568,000 bbl/d in the third quarter of 2008, somewhat higher than historic rates for inventory builds during this time of year. OECDcommercial inventories stood at 2.65 billion barrels at the end of the third quarter, equivalent to 57 days of forward consumption cover. On the basis of days of forward cover, OECD commercial inventories are well above historic levels, and EIA projects that they will remain there through the end of 2009 (Days of Supply of OECD Commercial Stocks).

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