Crude Oil and Liquid Fuels Overview. EIA expects a continued tightening of world oil markets over the next 2 years. World oil consumption grows by an annual average of 1.5 million barrels per day (bbl/d) through 2012 while the growth in supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries averages less than 0.1 million bbl/d each year. Consequently, EIA expects the market will rely on both inventories and significant increases in production of crude oil and non-crude liquids in OPEC member countries to meet world demand growth. While on-shore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained high last year, floating oil storage fell sharply in 2010, and EIA expects OECD oil inventories will decline over the forecast period.

There are many significant uncertainties that could push oil prices higher or lower than expected. Should OPEC not increase production as global consumption recovers, oil prices could be significantly higher than the central forecast. The rate of economic recovery, both domestically and globally, also remains uncertain due to a variety of factors including fiscal issues facing national and sub-national governments, China's efforts to address concerns regarding its growth and inflation rates, and unforeseen production issues.

Global Crude Oil and Liquid Fuels Consumption. World oil consumption grew by an estimated 2.2 million bbl/d in 2010, to 86.6 million bbl/d. This growth more than offset the losses of the previous 2 years and surpassed the 2007 level of 86.3 million bbl/d reached prior to the economic downturn. EIA expects average global consumption growth over the next 2 years to return to rates seen before the onset of the global downturn in 2008. Forecast global consumption growth averages 1.4 million bbl/d in 2011 and 1.6 million bbl/d in 2012, compared with an average of 1.3 million bbl/d per year from 2000 through 2007. From 2000 through 2007 the non-OECD countries as a group accounted for about three-fourths of total world consumption growth. The non-OECD countries are expected to account for all of the world's growth over the next 2 years, with the largest contributions coming from China, the Middle East, and Brazil (World Liquid Fuels Consumption Chart). Among the OECD regions, EIA expects that only North America will show oil consumption growth over the next 2 years, but it will be offset by continued declines in OECD Europe and Asia.

Non-OPEC Supply. EIA expects non-OPEC crude oil and liquid fuels production to rise by 160,000 bbl/d in 2011 and a further 20,000 bbl/d in 2012. Increases in non-OPEC oil production will be concentrated in a few countries, particularly in China, Brazil, and Canada, where EIA expects each to show annual average production growth of 120,000 to 150,000 bbl/d in 2011 and 2012. Ghana became a new non-OPEC oil producer with the startup of the Jubilee field in December of 2010. Other non-OPEC production is expected to decline. EIA expects Mexico's production will fall by about 200,000 bbl/d in 2011, followed by another production decline of 80,000 bbl/d in 2012. Similarly, the United Kingdom is expected to see production declines of an average 120,000 bbl/d in both 2011 and 2012 since oil production and the discovery of new reserves have not kept pace with the maturation of existing fields.

OPEC Supply. OPEC is not scheduled to meet again until June 2011 to discuss its production targets. Nonetheless, EIA expects that OPEC members' crude oil production will continue to rise over the next 2 years to accommodate increasing world oil consumption, especially with non-OPEC supplies expected to show limited growth. Projected OPEC crude oil production increases by 0.5 and 1.1 million bbl/d in 2011 and 2012, respectively. OPEC non-crude petroleum liquids, which are not subject to production targets, increase by 0.7 million bbl/d in 2011 and by 0.4 million bbl/d in 2012. EIA expects OPEC surplus production capacity will fall from about 4.7 million bbl/d at the end of 2010 to 4.3 million bbl/d at the end of 2012 (OPEC Surplus Crude Oil Production Capacity Chart).

OECD Petroleum Inventories. EIA estimates commercial oil inventories held in the OECD ended 2010 at 2.71 billion barrels, equivalent to about 58 days of forward-cover, and roughly 75 million barrels more than the 5-year average for the corresponding time of year. Projected OECD oil inventories decline over the forecast with days of forward-cover falling from current high levels to closer to the 5-year average by the end of 2012 (Days of Supply of OECD Commercial Stocks Chart).

Crude Oil Prices. WTI crude oil spot prices averaged over $89 per barrel in December, about $5 per barrel higher than the November average, as expectations of higher oil demand, combined with unusually cold weather in both Europe and the U.S. Northeast, lifted prices. EIA has raised the first-quarter 2011 WTI spot price forecast by over $7 per barrel from the last month's Outlook, to about $92 per barrel. WTI spot prices rise to an average $99 per barrel in the fourth quarter of 2012. Projected WTI spot prices average $93 per barrel in 2011 and $98 per barrel in 2012.

Energy price forecasts are uncertain (Energy Price Volatility and Forecast Uncertainty ). WTI futures for March 2011 delivery for the 5-day period ending January 6 averaged $91 per barrel, and implied volatility averaged 28 percent. This makes the lower and upper limits of the 95-percent confidence interval $76 per barrel and $109 per barrel, respectively, for WTI delivered in March 2011. Last year at this time, WTI for March 2010 delivery averaged $82 per barrel and implied volatility averaged 40 percent, with the limits of the 95-percent confidence interval at $66 per barrel and $102 per barrel. Based on futures and options prices over the first week in January, the probability that the monthly average price of WTI crude oil will exceed $100 per barrel in December 2011 is about 36 percent. Conversely, the probability that the monthly average December 2011 WTI price will fall below $80 per barrel is about 31 percent.

Source: U.S. Energy Information Administration