The Energy Information Administration released its Short-term Energy Outlook last week, lowering its expectations for crude and products demand in 2009, as well as revising down its price forecast for crude oil, gasoline and diesel. The agency said sliding consumption and building supply will create “a fairly loose oil market balance over the next 2 years.”

“The energy forecast is sensitive to economic conditions. In this forecast, U.S. real gross domestic product is expected to decline by 2 percent in 2009, leading to decreases in domestic energy consumption for all major fuels,” said EIA.

Regular grade gasoline in the United States is expected to average $1.87 gal this year, revised down by 16cts from the prior month, while the EIA forecasted the U.S. on-highway retail diesel fuel average 20cts lower than in December 2008 at $2.27 gal.

“The oil price path going forward will be driven mainly by the depth and duration of the global economic downturn, the pace and timing of the recovery, and actual OPEC production,” said the EIA.

The EIA expects West Texas Intermediate crude oil to average $43.25 bbl this year and $54.50 bbl in 2010 “[u]nder current economic assumptions and assuming no major crude oil supply disruptions.”

“Because of lower motor gasoline consumption, the difference between the retail gasoline price and the cost of crude oil is expected to remain narrow for much of 2009 but is expected to increase slightly in 2010,” said the EIA, with the agency anticipating the economic recovery to begin in 2010 with 2 percent year-over-year growth in GDP.

Motor gasoline consumption declined by slightly more than 300,000 bpd or 3.3 percent in 2008, with consumption this year expected to fall about 100,000 bpd. The economic recovery in 2010 is expected to boost motor gasoline production by 50,000 bpd.

Despite the cold weather that gripped much of the nation in December, distillate fuel consumption for 2008 declined 5.3 percent from the year prior. EIA projects distillate demand this year will decline about 100,000 bpd due to continued economic weakness while the expected economic recovery in 2010 is projected to lift distillate demand about 50,000 bpd.

“The projected continuation of the decline in the consumption of diesel fuel in the United States as well as a slowing of the growth in distillate fuel usage outside of the United States are expected to result in a weakening of refining margins for distillate throughout the forecast,” said EIA.

Total products consumption dropped 1.2 million bpd or 5.7 percent in 2008 from the year prior average due to record prices and the weakening economy.

In 2008, domestic crude oil production averaged 4.9 million bpd, down 140,000 bpd from 2007. Domestic crude production is expected to increase by over 300,000 bpd in 2009 to an average of 5.25 million bpd.

“This would be the first increase in production since 1991,” said the EIA. “Contributing to the increases in output are the Gulf of Mexico Thunder Horse platform, which is coming on stream now, and the Tahiti platform, expected to come on stream late in 2009.”

U.S. crude output is projected to rise by another 50,000 bpd in 2010.

After flat global oil consumption in 2008, the EIA again revised world oil consumption going forward lower, projecting a decline of 800,000 bpd in 2009. In 2010, the EIA said it expects an increase in global oil consumption by 880,000 bpd “on the assumption of the beginning of an expected recovery in global economic growth.”

The projected increase in global oil consumption is concentrated in developing countries outside of the Organization for Economic Cooperation and Development, particularly China, the Middle East, and Latin America. This year however, growth in oil demand by developing nations is expected to be more than offset by declining demand in OECD countries.

The EIA said revised data shows a 330,000 bpd increase in commercial inventories of OECD nations at the end of the third quarter 2008, which is lower than the typical stockpile build rate for the period. OECD commercial inventories stood at 2.63 billion bbl at the end of the third quarter 2008, equivalent to 57 days of forward consumption cover.

“On the basis of days of forward cover, OECD commercial inventories are well above average historic levels, and EIA projects that they will remain there through the end of 2010,” said the federal agency.

For OPEC supply, the EIA notes that previous announced production cuts, with the latest a 2.2 million bpd reduction in output that took effect Jan. 1, imply a total production rate excluding Iraq of 24.845 million bpd.

“However, the market is not presently convinced that OPEC members will willingly curtail output enough to lead to much higher prices. Adherence to the announced cuts will be challenging, as several individual countries are motivated to maintain production at higher levels to generate revenue needed to finance their government programs amid falling prices,” said the EIA.

EIA projects that total OPEC crude oil production which includes output from Iraq will decline by more than 2 million bpd from 31.4 million bpd in September 2008 to 29.3 million bpd during the current quarter, “implying a compliance rate of a little more than 50 percent.”