FORECAST FOR 2007

World oil demand forecast for 2007 has been slightly increased to reflect the upward revision on China's oil demand growth. As a result, word's oil demand growth for next year is forecast at a moderate rate of 1.33 mb/dor 1.57%. Minor upward revision to China's GPD growth forecast affected oil demand prospects for 2007.China and the Middle East will lead world oil demand growth with 0.45 mb/d and 0.30 mb/d respectively. Non - OPEC oil supply is expected to average 53 mb/d in 2007, representing an increase of 1.8mb/d versus 2006 and broadly unchanged from last month. On a quarterly basis, non-OPEC supply is expected to average 52.4 mb/d, 52.6-mb/d 52.9 mb/d and 54.1 mb/d in the first, second, third and forth quarters, respectively.

The FSU region is expected to grow 0.6 mb/d to 12.5 mb/d. Together, Caspian countries are expected to deliver more growth than Russia. However, recent trends in Russia are not supportive for current growth expectations there. Oil supply in the African region is forecast to grow 0.5 mb/d to 4.6 mb/d; most of the increase is expected to come from deepwater Angola, Equatorial Guinea and onshore Sudan. Oil supply in the North American region is expected to grow 0.4 mb/d to 14.7mb/d. The increase is driven by unwinding of losses in the US Gulf of Mexico (GoM), Alaska, US GoM deepwater, US ethanol and expansion of Canadian oil sands. Oil supply in the Latin American region is expected to grow by 0.2 mb/d to 4.7 mb/d; regional growth is driven by Brazil (crude and ethanol). Elsewhere, OECD Europe is expected to show a modest increase of 0.1mb/d to 0.7 mb/d. The forecast now reflects the return of some of the production that was lost in the Carnavon basin due to cyclone activity in Australia. Oil supply in other Asia and Middle East is expected to remain broadly flat at 2.8 mb/d and 1.8 mb/d, respectively. China's oil production is forecast to increase by 0.06 mb/d to 3.8 mb/d.

The forecast for 2007 remains broadly unchanged, but the base and outlook of some countries have been subject to revisions. On a quarterly basis, total non-OPEC supply has been revised down 30,000 b/d in 1Q07 and 20,000 b/d in 2Q07 and up 30,000 b/d in 4Q07.

The outlook for the USA has been revised down slightly. The Atlantis field is still expected to start in 2Q07 and no changes have been made to the ramp up period. However, recent reports suggest that its start up is likely to be end of 2Q07; therefore some adjustments have been made. In Australia, we have assumed that problems at the Enfield field will be fixed from 3Q07 onwards. The outlook for Brazil has been revised slightly up now that the Espadarte Module II FSPO will start earlier than expected thus having more impact on Brazil's oil production next year. The forecast assumes a conservative ramp up at the new fields including Golfinho Module 2, Espadarte Module II and Roncador P 52. Sudan's outlook has also been revised slightly up following better than expected performance in 2006. The outlook for Azerbaijan has been revised slightly up now that the East Azeri field started ramping up from late 2006 onwards versus a previous estimate of early 2007.

Risks
This reports highlights that the growth estimate for Russia next year may turn out to be optimistic. The current forecast sees total production averaging 9.8 mb/d (maximum of 9.9 mb in 4Q07), representing a growth of 190,000 b/d versus to 2005. The previous forecast estimated growth to be 210,00 b/d. Essentially, the Russian oil industry is not showing signs of vigorous growth anywhere and there are no positive catalysts that might give sufficient support to next year's forecast. The portfolios of non-state controlled companies are showing a poor to deteriorating performance, and state-linked companies are not growing fast enough. The reasons for these trends are well known, but what is driving these factors - i.e. underlying production trends across fields, well completions, company decisions, effectiveness of capex, etc, - are all too complex to see. This report has taken the conservative outlook for Russian medium-term growth since April 2005, but short-term fluctuations, including flat to a slight y-o-y decrease, are within possibilities.

As usual, the overall forecast for non OPEC for 2007 does not take into account a number of risks, such as the impact of extreme hurricane activity in the USA and Asia, unplanned shutdowns, material delays and political instability. Tightness in the oil service sector poses some risks, particularly when specialized services are suddenly required. Rising underlying costs also pose a risk in the near term for small marginal projects, EOR, and stripper wells. However, it should be noted that current oil prices are several times higher than average production and development costs of most producing regions. Finally, but of equal importance, sharp downward fluctuations in energy prices could affect some investment plans and as a direct consequence mature oil production, thereby reducing the growth. Combined, these risks could affect as much as 0.5 mb/d of the growth.

OPEC natural gas liquids and non- conventional oils
In 2006, OPEC NGLs and non- conventional oils are expected to average 4.3 mb/d, representing an increase of 0.2 mb/d over the previous year. All of the growth is coming from NGLs. In 2007, the expected growth for OPEC NGLs remains unchanged at 0.2 mb/d.

OPEC crude oil production
Total crude oil production averaged 29.4 mb/d in October, representing a drop of 0.16mb/d from last month, according to secondary sources. Iraq's oil production was 2 mb/d.

FSU net exports of crude and products
Total FSU net oil exports are now expected to average 8.2 mb/d in 2006, an increase of 0.5 mb/d over the previous year. Next year, total FSU net oil exports are expected to average 8.7mb/d, or o.5mb/d higher versus 2006 driven by new sources of crude from the Caspian and Russian product exports. The estimate has been revised down 0.1 mb/d for both 2006 and 2007.

Current trends
Preliminary figures for the month of October indicate that total crude exports remained steady at 6 mb/d, unchanged from the previous month. Including products, total net oil exports were 8.1mb/d in October, slightly higher than the previous month. Crude exports increased via the Black Sea, Baltic, and Druzha pipeline. Russian rail exports to Far East (China) also increased slightly. China's fourth quarter demand should be more stable. However, the filling of the newly constructed oil reserves may play a major role in China's fourth quarter oil demand. There will be no seasonality that may drastically affect petroleum product demand in the fourth quarter. With this in mind, if there is no change in gasoline export rates, then China will have an excess of gasoline supply until year- end. Due to the unexpected growth in China's oil demand in the third quarter, y-o-y oil demand growth was revised by 0.04 mb/d to show an increase of 0.57 mb/d for 2006.As was mentioned earlier, the filling of new Chinese oil storage may push fourth- quarter oil demand stronger than the current estimate.

     

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