Oil Markets After the Hurricanes: 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: Sources: History: EIA; Projections: Short-Term Energy Outlook, December 2005.

Weighing the MarketBulls 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 Source: New York Mercantile Exchange. 12/2/ /1/ /1/ /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 Wilma Ivan ‘000 bbl/d Rita Katrina Source: Short Term Energy Outlook, December 2005.

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

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 Source: International Energy Agency database, November 2005.

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 Source: International Energy Agency database, November 2005.

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 Source: International Energy Agency database, November 2005.

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 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 Source: U.S. Energy Information Administration. Product Imports Were Key Supply Source During September Through November

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 Source: International Energy Agency database, November 2005.

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 Source: International Energy Agency database, November 2005.

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 Non-OPEC oil supply is expected to grow by less than world demand in both 2005 and 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.