In its May Short-term Energy Outlook released last week, the Energy Information Administration revised lower its retail price forecast for gasoline and diesel fuel in 2009, while also adjusting down US and global oil demand, now expecting an even greater decline in world consumption this year.

“EIA is currently projecting a weaker global oil market for 2009 than anticipated in last month’s assessment. Expectations of global economic recovery and a resultant increase in demand were offset by initial data for the first quarter showing high oil inventories, weak consumption and higher-than-expected production,” said the Washington analysts in their monthly outlook.

Retail prices for regular grade gasoline is expected to average $2.12 gal this year, 4.0cts lower than projected in April, and down from the $3.26 gal average in 2008. During this summer driving season, which runs from April through September, regular gasoline retail prices are projected to average $2.21 gal, which is down roughly $1.60 from last summer.

“These projections indicate that total gasoline margins, which had declined last year as a result of weakness in gasoline consumption and growth in ethanol supplies, are expected to stabilize, albeit at low levels, as consumption slowly recovers and increases in ethanol supplies moderate,” said the EIA.

The federal agency also lowered its average for retail diesel fuel prices from its April outlook by 4.0cts, projecting diesel fuel at $2.26 gal in 2009. If realized, that’s down $1.54 from the 2008 average amid weak global demand and high uncertainty in “prospects for a global economic turnaround.”

For 2010, the EIA expects retail gasoline prices to climb to a $2.30 gal average, which is revised 12.0cts lower from its April outlook. The projected 2010 average for diesel fuel was adjusted down 21.0cts from April to $2.69 gal.

EIA continued that any oil price gains will “likely be muted” by the Organization of Petroleum Exporting Countries’ substantial excess production capacity and very high inventory levels among members of the Organization for Economic Cooperation and Development.

For demand, the EIA projects the consumption rate for gasoline this year to be slightly stronger than in 2008, when demand tumbled 320,000 bpd from the 2007 level to 8.98 million bpd. Analysts with the agency expect gasoline demand to increase by 70,000 bpd 0.7 percent in 2010 compared with this year’s consumption rate “as continuing high unemployment constrains increases in driving activity.”

Total consumption of liquid fuels and other petroleum products averaged 19.4 million bpd in 2008, down nearly 1.3 million bpd from 2007. Based on expectations the economy will remain weak, consumption is expected to fall another 570,000 bpd this year, led by a 200,000 bpd decrease in distillate fuel consumption. Assuming the gradual economic recovery in 2010, total liquid fuels consumption should increase 250,000 bpd. The agency reported distillate consumption in 2010 is projected to rise 50,000 bpd, reflecting weak recovery in industrial activity.

Total consumption of liquid fuels and other petroleum products averaged 19.4 million bpd in 2008, down nearly 1.3 million bpd from 2007.

“Based on the prospects of a continuing weak economy, consumption is projected to shrink by an additional 570,000 bbl/d in 2009, led by a 200,000-bbl/d fall in distillate fuel consumption,” said the EIA.

Total liquids fuel consumption is expected to increase by 250,000 bpd in 2010 on an “assumed gradual economic recovery.”

World oil consumption will now fall by 1.8 million bpd in 2009, according to the May outlook by EIA, reflecting a 400,000 bpd upward revision (lower demand) of its projections from last month's level. However, the EIA added, world oil consumption is expected to grow by 700,000 bpd in 2010 on the back of a rebound in global economic activity next year.

The EIA said its analysis of demand from Asia and the former Soviet Union showed a potential sharper demand decline that made the revision necessary, although demand from the rest of OECD countries were also supposed to be lower.

In total, OECD oil consumption is expected to fall by nearly 2.0 million bpd in 2009, with oil consumption in Japan alone expected to decline by more than 500,000 bpd this year.

However, declining OECD oil consumption will be offset by a growth of 200,000 bpd in non-OECD consumption, particularly in the Middle East, China, and India, said the EIA.

On supply, the EIA revised projected non-OPEC supply growth in 2009 upward to 100,000 bpd. In its April outlook, the EIA projected a steady output from non-OPEC. OPEC crude oil production, which includes Iraq, in the first quarter averaged 28.7 million bpd, roughly 3.0 million bpd below third quarter 2008 levels.

OPEC surplus crude capacity, which has increased from an estimated 1.0 million bbl in mid-2008 to 4.3 million bbl in April, is projected to remain relatively high over the forecast period, exceeding 5.0 million bpd in 2010, the EIA said.

Meantime, the EIA said preliminary estimates suggest that OECD commercial inventories increased by 34.0 million bbl during the first quarter, reaching 60 days of forward cover.

The U.S. was mostly responsible for this counter-seasonal build in OECD commercial inventories, with other OECD-member commercial stocks largely unchanged during that period.

EIA estimates there are also an additional 130.0 million bbl of crude oil in floating storage.