his long term forecast is based on the assumption that world production will remain at the
current level and that refiners will continue to purchase crude at discount prices to keep
tanks full. It also assumes world demand, except for the U.S. will remain essentially at the
current level and that the U.S. demand is the critical variable in the supply/demand picture.
U.S. stocks of crude oil, distillate and gasoline are high. Many refineries will find themselves
struggling with high levels of one product or the other throughout this year. During the months
January through March, gasoline storage will be a limiting factor and during the months May
through October, distillate storage will be a limiting factor. The period from mid-January through mid-
March will be a time of seasonally low demand, aggravated by any shut downs scheduled for this
period. Imports will drop below 7.5 million barrels per day.
During the spring run, in order to operate at maximum refining rates,
which will not exceed 95% utilization, refiners will have to limit gasoline production to 50% of
total production.
The cost of crude oil will be linked to the avoided cost of imported gasoline. Refiners will
determine the maximum amount they can afford to pay for crude oil to make gasoline as compared
to purchasing gasoline to supply their market. Thus, the lowest available spot price of gasoline
will directly impact the posted prices for crude oil. As a result, the spread between light (high
API gravity) and heavy (low API gravity) crude oil prices will increase.
Demand in the U.S. did not grow at the rate predicted by many forecasters and there is no
indication that demand will increase significantly within the next couple of years. However, if
prices remain as low as predicted in this forecast, it is estimated that U.S. crude oil
production may decrease
as much as 10% as marginal wells are taken off line. A 10% reduction will increase dependence on
foreign crude oil by 630,000 barrels per day, which will help, but will NOT relieve the current
world crude oil production glut.
Overall, the next two to three years will be a time of oil industry consolidation and "survival
of the fittest." The major oil companies, especially those planning mergers, are best positioned
to take advantage of the situation.
(International) State owned production will struggle to find markets for all the crude they can
produce and much of the recently discovered reserves will remain in the ground until demand
increases over the next few years. The recovery this time may be slow in coming. Years of
energy conservation programs in the industrial world seem to have finally kicked in. The "baby
boomers" are retiring and not commuting daily to work. Finally, the development of new gasoline/fuel
cell technology supported by oil and auto industry are likely to significantly reduce U.S. demand for
gasoline within the next few years.
Production and oil field service companies may see almost no growth and will be forced to follow
the lead of majors merging to consolidate resources and minimize costs. On the other hand, many
industries, municipalities and consumers will reap the benefits of continued low product prices
in 1999.
As long as competition for market share continues among OPEC countries, crude oil supplies will
remain higher than demand. At this point, with world tanks brimming with crude oil and going
into a U.S. seasonal demand slump which will drop imports by an additional 1.7 million barrels
per day for at least 4 weeks, OPEC would have to cut back production by 5 million barrels per day
to begin to correct the problem. Once world inventories are lowered, the impact of reduced
production could again cause changes in pricing.
