Drop-off Will Be Just 760,000 Barrels a Day

ENERGY MATTERS: 2Q Oil Demand Drop May Be Smaller Than Norm

NEW YORK (Dow Jones)--The traditionally weak second quarter in the oil market is expected to track its familiar course this year: higher prices and lower demand. In each of the past 10 years, global oil demand has dropped during April, May and June from the January-March quarter, reflecting the end of winter in the Northern Hemisphere and reliably clocking in as the weakest period of the year.

The average quarterly decline in the past decade has been 2.1% of global demand, or about 1.7 million barrels a day. But with oil prices already trading near record highs above $110 a barrel, the second-quarter global demand drop looks to be anything but typical this year.

The U.S. Energy Information Administration projects the drop-off will be just 760,000 barrels a day, or less than 0.9%. That's the slimmest decline since 2004, when raucous booming demand growth from China and other developing countries ignited the rally that has tripled the value of crude oil.

By the EIA's estimation, second-quarter global demand will average 85.66 million barrels a day this year - virtually the same level as the fourth quarter of 2006, which was the strongest for the year.

The EIA projects the average price for U.S. benchmark West Texas Intermediate crude oil will average a record $103.67 a barrel in the quarter, a 5.9% rise from the first quarter and nearly 60% above a year ago.

Nymex crude oil futures prices on Thursday settled at $110.11 a barrel, down 76 cents from a record high a day earlier. So far in April, prices are averaging near $107 a barrel. Heating oil futures settled 4.05 cents below the record high set Wednesday, at $3.194 a gallon, while gasoline blendstocks futures settled at a record $2.7921 a gallon, up 1.79 cents.

Retail gasoline and diesel fuel prices set fresh record highs Thursday, with regular gasoline at $3.357 a gallon, up 20% from a year ago, according to AAA Daily Fuel Gauge Report. Diesel fuel was priced at $4.045 a gallon, up 39% from a year ago.

Saudis Won't Pump To Dump Price

Crude oil futures stumbled last month after settling above $110 a barrel for the first time, sliding below $99 intraday before recovering to a record Wednesday. Analysts said the market may be in for a similar ride of slippage followed by fresh highs as the strength in the relative strength in the global market eclipses weakness in the U.S., the world's largest oil consumer.

The EIA said the global oil market will remain fundamentally tight in the second quarter. And there are clear fresh indications that the Organization of Petroleum Exporting Countries isn't troubled enough by record high oil prices to open the taps. Saudi Arabian Oil Minister Ali Naimi said Thursday at an industry conference in Paris that the de facto leader of OPEC won't "dump oil into the market" to cool down prices.

"If there are buyers, then we sell...more oil," said Naimi. "I believe the market is well supplied. Inventories are building...the world is producing more oil than is being consumed." Saudi Arabia is the world's largest oil exporter.

The EIA said in its Short-Term Energy Outlook on Tuesday that U.S. oil demand in the first quarter fell by a steep 480,000 barrels a day from a year earlier.

That was the biggest drop in any quarter since the fourth-quarter 2001, following the Sept. 11, 2001, attacks on the U.S. Second-quarter demand, in comparison, is expected to fall year-on-year by just 80,000 barrels a day - despite unusually sluggish gasoline demand. U.S. second-quarter oil demand is expected to rise 280,000 barrels a day, or 1.4%, from the first quarter.

Worst Of U.S. Demand Drop Passed?

If those projections hold true, then the worst of the U.S. demand slump may be past. "The darkest part of the night was February, March was better and April has begun strongly," said Paul Horsnell, analyst at Barclays Capital in London. He said the first sign of April gasoline demand is holding up well, in the face of record high prices, which were up 40% year-on-year in January, but are only up by half that level now.

Horsnell said in a report he believes year-on-year changes in U.S. gasoline demand are "strongly influenced" by year-on-year price changes, and thus the slowdown in the pace of the price rise implies that "demand might yet prove to be stronger this quarter than is generally expected."

The EIA sees a dip of around 40,000 barrels a day year-on-year in second-quarter gasoline demand and a drop of around the same size for the full April-September driving season. That would be the first drop since 1991 and contrasts with average year-on-year summer growth of 129,000 barrels a day since 1992.

Analysts at Goldman Sachs raised their forecast for oil prices in the second half of 2008, saying the "upside potential...is likely to be above $115" a barrel, instead of $105 projected earlier.

Goldman said it continues to expect "a modest inventory build this spring" that will weaken the timespread between forward contracts and the front-month futures contract. But it said it believes the downside risk is limited to $98 a barrel, not $90 as previously thought. Goldman also said it sees the tight global market for middle distillate fuels, like diesel fuel, easing soon as arbitrage trade evens out supplies.

The market is only tight in a few key regions, such as New York Harbor and Amsterdam-Rotterdam-Antwerp, helped by late winter-weather-related demand. Stocks elsewhere "are at comfortable levels," Goldman said in a research report.

"This suggests that, as arbitrages even out global supplies, the strong regional diesel markets that have been driving the overall complex higher will begin to ease," Goldman said. "Without strong diesel support from these regions, the market will have to rely on U.S. gasoline and the transportation markets, which remain extremely weak."

(David Bird is senior energy correspondent for Dow Jones Newswires.)

-By David Bird, Dow Jones Newswires; 201-938-4423; david.bird@dowjones.com

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