BP oil drilling rig in the Gulf of Mexico

The US Energy Department said on Tuesday that it expects oil to average $101 a barrel this year, a big upward revision from its January forecast.

The US benchmark West Texas Intermediate (WTI) for crude oil prices traded on the New York Mercantile Exchange, which averaged $72.32 per barrel in 2007, are projected to average $101 per barrel in 2008 and $92.50 per barrel in 2009. The EIA had predicted $87-a-barrel oil in January, for 2008.

The US Energy Information Administration (EIA) unit of the Department of Energy, expects American drivers, truckers and airlines to use less fuel this year as the economy slows. That could take some pressure off prices for gasoline and other fuels, and keep the price of gasoline under a US average of $4 a gallon.

The EIA said that the projected higher costs for crude oil will contribute to higher petroleum product prices.  Motor gasoline prices are projected to average $3.36 per gallon in 2008, up 55 cents from last year.  Diesel prices are projected to show even larger increases in 2008, averaging $3.62 per gallon, or 74 cents above the 2007 average price.  The monthly average gasoline price is projected to peak at about $3.60 per gallon this spring, while monthly diesel prices are expected to average about $3.90 per gallon in March and April.  Weekly diesel prices have already crossed the $4.00-per-gallon threshold in many regions of the country.

US consumption of liquid fuels and other petroleum is expected to decline in 2008 by about 85,000 barrels per day (bbl/d) as a result of the economic slowdown and high petroleum prices.  After accounting for increased ethanol use, US petroleum consumption is projected to fall by 210,000 bbl/d in 2008.   

While a year ago, breaching the $100 a barrel threshold wasn't inconceivable, it's surprising that the $100 + price has become the norm with so much ease.

Crude oil for May delivery is trading Wednesday morning at$ $108.72 on the New York Mercantile Exchange, up 22 cents from tuesday's close. Oil hit a record high of $110.33 on March 13th.

The EIA says that the global oil market remains fundamentally tight entering the second quarter, despite a slowdown in US oil consumption and growing risks to global economic growth.  The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices.  The flow of investment money into commodities has contributed to crude oil price volatility.

The agency predicts that even with falling consumption in the US, oil demand world-wide will jump by 1.2 million barrels a day this year.

The EIA says that inventories are improving in the Organization for Economic Cooperation and Development (OECD) countries, but given the lack of surplus capacity and geopolitical concerns in Nigeria, Venezuela, and Iraq, a higher level of commercial inventories is desirable.  The magnitude, breadth, and duration of any global economic slowdown will certainly influence market conditions over the near term.  The increase in non-Organization of the Petroleum Exporting Countries (OPEC) production in the second half of the year, however, is expected to contribute to increases in OPEC surplus crude oil production capacity and ease upward price pressures toward the end of the year

Short-Term Energy and Summer Fuels Outlook