U.S. and global oil demand will slip as winter weather ebbs in 2Q 2006, but crude oil prices will rise from winter levels, according to a close reading of the Energy Information Administration’s latest Short-Term Energy Outlook, which was released Tuesday.

The forecast, if borne out, will be another example that the cliche of a ‘’weak second quarter'’ may be true for oil demand, but isn’t true for crude oil prices. In the past two years, second-quarter crude prices have averaged above their first-quarter level by 6.7% and 8.8%, respectively.

In its report, EIA, the statistical and analytical wing of the Department of Energy, said it lowered its crude price forecast in the coming months due to lower products prices caused by warm weather and ongoing hurricane recovery efforts. The new 4Q 2005 forecast for U.S. benchmark West Texas Intermediate is a fix on an overstated projection last month. The revision puts crude in this quarter at $60.19 a barrel, compared with $60 so far in the quarter. That’s down from last month’s projection of $63.09.

But while EIA lowered the actual numbers in its near-term crude price forecast, it increased the rate of expected price rise in percentage terms. Last month, EIA had projected 1Q 2006 prices would gain by 1.4% from the 4Q 2005 price, but would dip by 0.4% in the 2Q 2006, to $63.75, or 25 cents below the 1Q level.
Now, EIA forecasts, 1Q 2006 crude will rise by 3.7% from the 4Q level, to an average of $62.42, and will rise by a further 0.9% in 2Q, to $63 - the highest quarterly price since the record high 3Q 2005 level of $63.19.
The expectation of higher 2Q oil prices comes even as global oil demand is expected to drop by 1.75% from 1Q and demand in the U.S. - the world’s largest oil market - accounting for 25% of global demand - will slip by 0.3%. Those projected rates of decline are just slightly down from the year-ago level.

EIA projects OPEC’s output will drop to 29.6 million barrels a day in 1Q and 2Q 2006 from 30.2 million b/d in the current quarter. So far, though, some members of OPEC, which meets Dec. 12 in Kuwait have given preliminary signs that they’ll keep output policy unchanged.

Only a steep slide in crude prices would force OPEC to change tack, and that doesn’t appear to be in the cards now. Not just because EIA is projecting gains - with 2006 crude expected to average a record high $63.33, up from $56.54 this year - but because oil futures markets continue to place a premium on forward contracts. That’s because despite all of OPEC’s manueverings, the cushion of spare oil output capacity won’t rise much and demand growth will continue next year.

And the world won’t be any less dangerous a place.

The trial of Saddam Hussein in a Baghdad court room isn’t lacking high drama, grisly testimony or bizarre theater. What it does lack - so far - is any testimony directly linking the former Iraqi leader to the killing of 148 Shiite men in Dujail, north of Baghdad, in 1982. Saddam and co-defendants have pleaded not guilty. By all accounts, the testimony and Saddam’s responses have been shocking. While the case is far from finished, evidence tying Saddam directly to the charges will need to come sooner, rather than later, to calm the theatrics. Many commentators across the global have expressed unease about Saddam being tried in Iraq, instead of an international tribunal under the auspices of the United Nations.

While no one - but perhaps for Saddam and his attorneys - is predicting the former leader will beat the charges, there hasn’t been much talk of the possibility, save for an item on the Web’s Drudge Report which said the White House has a plan to deal with that outcome. A ‘’top Bush source'’ was quoted as saying that more charges would be filed, and still more, if Saddam is acquitted on the current case. Prosecutors reportedly will present a videotape of Saddam issuing assassination orders. Restraint and jurisprudence will be the best weapons for the prosecution. Though it wasn’t a criminal trial, the nagging reminders of Kuwait’s over-reaching campaign to win U.S. military action to push Saddam out of Kuwait in 1991 come to mind.

Back then, Kuwait hired a powerful U.S. PR firm to help present its case, which included graphic claims of widespread episodes of babies being ripped from incubators in Iraqi hospitals. It later turned out that a witness, testifying before Congress in secret to protect her identity, was actually the 15-year-old daughter of Kuwait’s then-U.S. ambassador, Sheikh Saud Nasser Al-Sabah (later its oil minister), and the events described were hyped. For justice to be done that will stand the test of history, not just hurriedly end an historical chapter for political purposes, only the unvarnished truth will produce a fair trial - and a fair verdict.

A visit to Dharan, Saudi Arabia, by a reporter from The New York Times yields some interesting color and an exotic dateline, but story Tuesday doesn’t shed much light on what’s motivating the world’s largest oil producer and exporter.

The story attempts to unwrap the enigma in the sand, but falls far short for one crucial reason: It doesn’t address the Saudi view of appropriate oil prices.

Saudi Arabia’s thinking has evolved over the years since it was ‘’swing producer'’ more than 20 years ago. Back then, it would single-handedly take on the burden of cutting back output deeply to try to artifically support prices. Trouble was, their OPEC brethren - and major non-OPEC players - were boosting output and raking in more revenue at the expense of the Saudis. Since then, even if it’s just a cosmetic move, the Saudis have insisted that all of OPEC (and at times some non-OPEC fellow travelers) cut output when prices are under severe pressure.

What’s crucial about the recent market situation is that the Saudis have noticed that steadily rising oil prices over the past few years haven’t hurt the world economy or significantly lessened oil demand. And the world’s biggest oil producer and consumer, the U.S., hasn’t pressured the Saudis to see it any differently.

What the Saudis see as the appropriate price for oil - and how low prices would go before they would cut output is the crucial question for the global economy. Some hints may be forthcoming at the Dec. 12 OPEC meeting in Kuwait, but don’t hold your breath. Oil Minister Ali Naimi likely will resist talking about appropriate prices while the market is strong heading into winter.

Naimi recently declared the market situation as ‘’beautiful,'’ applying the one true rule of OPEC. Whenever a minister comments on the status quo - the status quo immediately changes in reaction to the comments. In this case, Naimi’s apparent content was a reason to push prices up by $2-$3 a barrel.

With little incremental output capacity coming on line for the next couple of years, oil prices are likely to be underpinned around current high levels. But the Saudis seem fine with that. Much will depend on how much the Saudis and the rest of OPEC trim output when demand hits seasonal ebbs. The Saudis, ensconced as price-takers, rather than price-makers, in recent years are likely to take a cautious approach, allowing stocks to build modestly, while avoiding a price collapse.
At times, the Saudis and their secretive ways seem to be their own worst enemy from a political perspective. And the kingdom’s refusal so far to clarify their market aims only adds fuel to the fire of the vocal minority of analysts who claim Saudi output is nearing its peak.

Saudi output restraint and capacity investment restraint in recent years has been based solely on political decisions - not the conditions of oil reservoirs. And so far, the world economy has proved them right.

The record-breaking 2005 hurricane season officially ended less than a week ago. So, it is time to start buying plywood, nails and duct tape - and energy futures - ahead of next year?

Veteran Colorado State University hurricane forecaster William Gray predicts 2006 will be active, but not as severe at this past season, which damaged oil and gas producing and processing facilities along the Gulf Coast. Gray, who has been making predictions for 22 years, gives the following rundown for next season: 17 named storms, 9 hurricanes and 5 intense hurricanes. That compares with the record 26 named storms, 14 hurricanes and 7 major hurricanes this past season.

News of Gray’s forecast is here, while would-be weathermen who want the technical assessment straight from the source can find the original report here.

For the Gulf Coast oil region, Gray’s nutshell forecast is: likelihood of tropical storm 74% (vs 59% over the past 100 years); likelihood of category 1-2 hurricane 61% (vs 42%); likelihood of category 3-4-5 storm 47% (vs 30%); likelihood of all hurricanes 79% (vs 61%); likelihood of named storm 95% (vs 83%).

It’s worth noting, too, that the professor’s forecasts for the past three years have underestimated the extent of the hurricane season. For 2005, Gray forecast 11 named storms, 6 hurricanes and 3 intense hurricanes.