First Katrina and then Rita. This has been a tough year for oil production in the Gulf of Mexico and, as of December 22, 2005, 28% of oil production in the gulf remains closed. The energy markets were already tight before the hurricanes and this disruption doesn't help. For all of the bad press that the oil companies are getting about their big profits, it should be acknowledged that they have done an impressive job of building supplies ahead of winter under very tough circumstances.

On December 12, 2005, OPEC met and agreed to keep their official production quota at 28.0 million barrels per day, but will try to cut actual production by roughly 200,000 barrels per day. On December 6, 2005, the DOE estimated OPEC's actual production at 30.2 million barrels per day in November with 1.8 million barrels coming daily from Iraq. The DOE also estimated 85.5 million barrels per day of world oil demand in the fourth quarter, exceeding supply by 1.6 million barrels per day. For all of 2005, the global oil situation remains tight with projected supply at 84.2 million barrels per day and demand at 83.7 million barrels per day. In 2006, the DOE expects world oil production at 85.5 million barrels per day and demand at 85.4 million barrels per day. Russia's oil industry has a fragile relationship with the government after Yukos was gutted and sold. Nigeria has problems of civil unrest and rebels are frequently threatening the oil industry. Venezuela's oil production is struggling and President Chavez wants more customers outside of the U.S. Meanwhile, the limit of China's appetite for oil is unknown and the world economy continues to grow.

On December 6th, the DOE predicted that West Texas crude prices will average $60.19 in the fourth quarter of 2005, up from $48.31 a year ago. As of December 23rd, U.S. crude stocks were up 13% from a year ago. OPEC will next meet on January 31st in Vienna.

...the price of West Texas Intermediate (WTI) crude oil is projected to average $57 per barrel in 2005 and $63 per barrel in 2006...

Worldwide petroleum demand growth in 2005 is projected to slow from 2004 levels, due largely to slower growth in China and the United States. However, world oil demand is estimated to increase by about 1.7 million bbl/d in 2006, up from 1.2 million bbl/d in 2005, led by an oil demand recovery in the United States.

U.S. Department of Energy's Short-term Energy Outlook. December 6, 2005.

Although medium-term demand and supply fundamentals point to lower oil prices, the slow recovery in refinery production and the onset of winter could see substantial volatility in oil prices. Overall, we project WTI to average US$58.50/barrel in 2005, US$57 in 2006, and US$52 in 2007.

BMO Financial Group's Commodity Price Report. October, 2005.