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EIA Report Says Oil Market to Tighten in Coming Months

June 09, 2011

WASHINGTON – The federal government’s Energy Information Administration (EIA) released its latest “This Week in Petroleum” report. It stated that although crude oil prices have softened recently, with a drop in price of more than 10 percent from its high at the end of April through May 9, oil markets are likely to tighten in the coming months.

In terms of the near future, the EIA said that the second quarter is generally a seasonal low point in global oil consumption, which was reinforced by a number of factors across the globe, from the earthquake in Japan to refinery outages. Actual retail gasoline prices show this, as prices have fallen roughly 20 cents since early May, when the price of gas nearly reached a national average of $4 per gallon.

Even though prices have fallen, there are a number of global factors that could lead to higher prices. Global demand will rebound as the effects of the events mentioned above subside. Factors affecting the current and projected oil supply include the civil war in Libya, which effectively cut off production in that country, and unrest in Yemen.

OPEC’s meeting on June 8 ended without an agreement on whether to increase production levels, though Saudi Arabia said it’s willing to boost production. The EIA said the oil supply depends on whether production capacity increases. The seasonal swing in global demand for oil, plus the lost production in Libya, increases the likelihood of higher oil prices through the end of the year. The EIA said OPEC will need to significantly increase oil production to make up for the lost capacity in Libya.

A couple of regional examples cited by the EIA that indicate rising oil demand in the third quarter include electricity shortages in China and summer air-conditioning needs in the Middle East. The EIA expects higher third-quarter diesel consumption in China as a result of those shortages, with an increase in diesel use in back-up generators. Higher summer air-conditioning needs in the Middle East are due to expansion of residential areas in the region over the last few years.

The EIA’s outlook forecasts an increase in West Texas Intermediate crude oil prices from $102 per barrel in June to $106 per barrel by the end of 2011. Just how much gasoline and diesel prices rise depends on whether or not oil-producing countries actually increase production and remains to be seen.

You can read the EIA's "This Week in Petroleum" report here.

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