Short-Term Energy Outlook June 2010
- Crude oil prices fluctuated considerably last month, with the West Texas Intermediate (WTI) spot price ranging from a high of $86 per barrel on May 3 to a low of $65 on May 25, before ending the month at $74. According to some market analysts, uncertainty over the global economic recovery, particularly with respect to Europe's debt crisis and the tightening of credit by China, and liquidation of futures contracts contributed to the crude price decline. Moreover, WTI prices fell further than most other crudes because of record high inventories in Cushing, Oklahoma. EIA projects WTI crude oil spot prices will average $79 per barrel this year and $83 per barrel in 2011, both about $3 lower than in last month's Outlook.
- EIA forecasts that regular-grade motor gasoline retail prices will average $2.79 per gallon during this summer's driving season (the period between April 1 and September 30), up from $2.44 per gallon last summer. The summer gasoline price forecast is down considerably ($0.15) from last month's Outlook primarily as a result of the lower crude oil price forecast.
- Based on the current Atlantic hurricane season outlook from the National Oceanic and Atmospheric Administration (NOAA), EIA estimates median outcomes for total shut-in production in the Federally-administered Gulf of Mexico during the upcoming hurricane season (June through November) of 26 million barrels of crude oil and 166 billion cubic feet (Bcf) of natural gas (see 2010 Outlook for Hurricane-Related Production Outages in the Gulf of Mexico). Actual shut-ins are likely to differ significantly from this expectation depending on the number, track, and strength of hurricanes as the season progresses.
- This Outlook includes EIA's preliminary estimates of reductions in production resulting from a 6-month deepwater drilling moratorium announced by Secretary Salazar on May 27. The reductions in crude oil production resulting from the moratorium are estimated to average about 26,000 barrels per day (bbl/d) in the fourth quarter of 2010 and roughly 70,000 bbl/d in 2011. EIA will refine its moratorium impacts as additional information becomes available.
- EIA expects the Henry Hub natural gas spot price to average $4.49 per million Btu (MMBtu) this year, a $0.54-per-MMBtu increase over the 2009 average. EIA expects the Henry Hub spot price to average $5.06 per MMBtu in 2011, down $0.28 per MMBtu from last month's Outlook.
- The annual average residential electricity price changes only moderately over the forecast period, averaging 11.6 cents per kilowatthour (kWh) in 2010, up slightly from 11.5 cents per kWh in 2009, and rising to 11.9 cents per kWh in 2011.
- Estimated U.S. carbon dioxide (CO2) emissions from fossil fuels, which declined by 7.0 percent in 2009, are expected to increase by 2.9 percent and 1.4 percent in 2010 and 2011, respectively, as economic growth spurs higher energy consumption.
Crude Oil and Liquid Fuels Overview. EIA has lowered its projections for world oil prices slightly for 2010. Uncertainty about economic growth in China and in the Euro zone has continued to weigh on oil markets, and declines in equity markets have led to fears that the economic recovery may not progress as fast as had been hoped. To date, the Organization of the Petroleum Exporting Countries (OPEC) has publicly made no suggestions that it would adjust its supply targets despite some downward adjustments in oil prices.
Global Crude Oil and Liquid Fuels Consumption. EIA projects that world oil consumption will grow by 1.5 million bbl/d in 2010 and 1.6 million bbl/d in 2011, about the same as in last month's Outlook. The growth in oil consumption is expected to be largely concentrated in the Asia-Pacific and Middle East regions (World Liquid Fuels Consumption Chart).
Non-OPEC Supply. Non-OPEC supply is projected to increase by 500,000 bbl/d in 2010, 160,000 bbl/d lower than in last month's Outlook. A more pessimistic outlook for supply growth in Brazil and Central Asia is the principle source of the downward revision, though these two areas (along with the United States) still constitute the bulk of expected non-OPEC supply growth in 2010. In the case of Brazil, the lower production outlook is the result of a re-assessment of production from established fields. Offsetting projected supply growth in 2010 are further declines in mature basins in Mexico, the United Kingdom, and Norway. Even though EIA still expects that production in Mexico will decline in 2010, recent data have been surprisingly strong, which has moderated that forecast. Non-OPEC supplies are expected to fall by190,000 bbl/d in 2011, as supply growth from the United States slows.
OPEC Supply. EIA projects that OPEC, which did not change its production targets at its March meeting, will keep its crude oil production largely unchanged for the remainder of 2010. The countries that have the bulk of OPEC 's spare capacity - Saudi Arabia, Kuwait, and the United Arab Emirates - have maintained their quota discipline at current levels for an extended period and are expected to continue doing so barring significant changes in the world oil market outlook. OPEC crude oil production is projected to increase by 0.5 million bbl/d in 2011 as new capacity is added in countries such as Angola. Surplus crude oil production capacity is not expected to increase significantly in 2010-2011 from first-quarter 2010 levels (OPEC Surplus Crude Oil Production Capacity Chart). OPEC production of non-crude petroleum liquids (which are not subject to OPEC production targets) are expected to increase by 0.6 million bbl/d in 2010 and 0.7 million bbl/d in 2011.
OECD Petroleum Inventories. EIA estimates that commercial oil inventories held in the Organization for Economic Cooperation and Development (OECD) stood at 2.70 billion barrels at the end of the first quarter of 2010, equivalent to about 58 days of forward cover, and roughly 102 million barrels more than the 5-year average for the corresponding time of year (Days of Supply of OECD Commercial Stocks Chart). Although OECD oil inventories are still projected to remain at the upper end of the historical range over the forecast period, they are falling as a result of a combination of higher oil consumption and OPEC production restraint.
Crude Oil Prices. WTI crude oil spot prices averaged less than $74 per barrel in May 2010, almost $11 per barrel below the prior month's average and $7 per barrel lower than forecast in last month's Outlook. EIA projects WTI prices will average about $79 per barrel over the second half of this year and rise to $84 by the end of next year (West Texas Intermediate Crude Oil Price Chart).
Energy price forecasts are highly uncertain, as history has shown (Energy Price Volatility and Forecast Uncertainty). Implied volatility in the crude oil futures options market rose in May. WTI futures for August 2010 delivery for the 5-day period ending June 3 averaged $74.95 per barrel, and implied volatility averaged 39 percent. This made the lower and upper limits of the 95-percent confidence interval $58 and $97 per barrel, respectively.
Last year at this time, WTI for August 2009 delivery averaged $64.52 per barrel, and implied volatility averaged 44 percent, rendering the limits of the 95-percent confidence interval $47 and $88 per barrel.
U.S. Crude Oil and Liquid Fuels
U.S. Liquid Fuels Consumption. U.S. liquid fuels consumption is beginning to show signs of recovery after having fallen by an average 810,000 bbl/d in 2009, the fourth consecutive annual decline (U.S. Liquid Fuels Consumption Growth Chart). Total liquid fuels consumption fell by an average 20,000 bbl/d in the first quarter compared with the same period last year. Projected total consumption for the current quarter, however, rises 490,000 bbl/d per day compared with the same period last year, with motor gasoline consumption increasing 70,000 bbl/d and distillate consumption up 220,000 bbl/d. Projected total liquid fuels consumption grows by an average 230,000 bbl/d in 2010 and 200,000 bbl/d in 2011 as all of the major petroleum products register consumption growth.
U.S. Liquid Fuels Supply and Imports. Projected domestic crude oil production increases by about 70,000 bbl/d in 2010 (U.S. Crude Oil Production Chart), which is 110,000 bbl/d less than in last month's Outlook, primarily because of the new NOAA forecast of a more active hurricane season this year. EIA estimates a median outcome of 17 million barrels of total shut-in crude oil production because of tropical storm activity in the Gulf of Mexico this year (see 2010 Outlook for Hurricane-Related Production Outages in the Gulf of Mexico).
Forecast crude oil production in 2011 falls by 20,000 bbl/d to 5.38 million bbl/d, which is also about 110,000 bbl/d less than in the previous Outlook. The lower production forecast includes EIA's preliminary estimates of the total cumulative reductions in the output of crude oil from the deepwater Gulf of Mexico of 2.4 million barrels in 2010 and 25 million barrels in 2011 because of the recently-imposed 6-month drilling moratorium. The reductions in crude oil production increase from a monthly average of about 9,000 bbl/d in September 2010 to 80,000 bbl/d by December 2011.
Projected ethanol production, which averaged 700,000 bbl/d in 2009, increases to an average of 860,000 bbl/d in 2010 and 890,000 bbl/d in 2011. EIA forecasts that liquid fuel net imports (including both crude oil and refined products), which declined by 1.4 million bbl/d in 2009, will fall by a further 110,000 bbl/d in 2010. In 2011, projected total liquid fuel net imports increase by 90,000 bbl/d.
U.S. Petroleum Product Prices. Projected regular-grade gasoline retail prices average $2.76 per gallon in 2010 and $2.92 per gallon in 2011. These projections are 10 and 6 cents per gallon, respectively, lower than those in the previous Outlook as a result of lower crude oil price projections. Forecast regular-grade pump prices average $2.79 per gallon this summer, up by 35 cents from the previous summer.
On-highway diesel fuel retail prices, which averaged $2.46 per gallon in 2009, average $2.96 per gallon in 2010 and $3.11 in 2011 in this forecast.
U.S. Natural Gas Consumption. Total natural gas consumption is about 0.5 Bcf/d higher in this forecast than in last month's Outlook, averaging 64.9 Bcf/d and 64.6 Bcf/d in 2010 and 2011, respectively (Total U.S. Natural Gas Consumption Growth Chart ). Projected consumption grows by an average 2.4 Bcf/d (3.8 percent) in 2010 led by strong growth in the electric power and industrial sectors. Forecast natural gas consumption in the electric power sector increases by an average 1.0 Bcf/d (5.5 percent) in 2010 over last year, driven primarily by higher electricity demand. EIA's projected natural-gas-weighted industrial production index (a measure of industrial activity in natural-gas-intensive industries) increases by 6.7 percent in 2010, leading to a 1.0 Bcf/d (6.1-percent) increase in natural gas consumption in the industrial sector.
Projected natural gas consumption falls slightly in 2011 as forecast growth in the industrial sector slows to 0.2 Bcf/d. This growth is more than offset by the projected 0.5 Bcf/d decline in natural gas consumption in the electric power sector.
U.S. Natural Gas Production and Imports. EIA expects total marketed natural gas production to increase by 1.2 Bcf/d (2.1 percent) to 61.2 Bcf/d in 2010, an upward revision of 0.5 Bcf/d from last month's Outlook. Natural gas production grew steadily over the first 3 months of this year as the number of working natural gas rigs reported by Baker-Hughes increased from 759 to 941. The production forecast was revised upwards as the number of working rigs continued to increase to almost 970 at the end of May.
The increase in production is partially offset by new estimates of shut-in production based on NOAA's latest hurricane forecast. Tropical storm activity and the accompanying production outages are expected to be significantly higher this year than last year. EIA estimates the median outcome for projected total shut-in production due to tropical storms from June through November 2010 is 166 Bcf compared with an estimated 19 Bcf shut-in production last year (2010 Outlook for Hurricane-Related Production Outages in the Gulf of Mexico ).
Forecast natural gas marketed production in 2011 falls almost 0.5 Bcf/d to 60.8 Bcf/d in 2011. This forecast includes EIA's preliminary estimates of the total cumulative reductions in output of natural gas from the deepwater Gulf of Mexico of 8 Bcf in 2010 and 74 Bcf in 2011 because of the 6-month drilling moratorium. The reductions in natural gas production increase from a monthly average of about 0.03 Bcf/d in September 2010 to 0.24 Bcf/d by December 2011.
Projected liquefied natural gas (LNG) imports increase by 0.27 Bcf/d (22 percent) and 0.16 Bcf (11 percent) in 2010 and 2011 respectively. Despite this growth, high prices in the European and Asian markets relative to the United States will continue to draw LNG cargoes, with the United States serving as a secondary market. Forecast pipeline imports in 2010 have been increased by 0.29 Bcf/d from last month's Outlook. Pipeline imports are expected to play an important role in offsetting forecast hurricane-related production outages in the Gulf of Mexico.
U.S. Natural Gas Inventories. On May 28, 2010, working natural gas in storage was 2,357 Bcf (U.S. Working Natural Gas in Storage Chart ), 306 Bcf above the previous 5-year average (2005-2009) and 38 Bcf above the level during the corresponding week last year. EIA expects working gas inventories at the end of October 2010 to be about 3,805 Bcf, slightly below the level reached at the end of October last year and the peak inventory of 3,837 Bcf reached on November 27, 2009.
U.S. Natural Gas Prices. Sustained low natural gas prices this summer are expected to contribute to a decline in natural gas drilling activity over the next several months. As a result, the current 2011 forecastof higher prices comes as production begins to decline later this year and next. The projected Henry Hub spot price averages $4.49 per MMBtu in 2010 and $5.06 per MMBtu in 2011 (Henry Hub Natural Gas Price Chart ).
Uncertainty over future natural gas prices is lower this year compared with last year at this time. Natural gas futures for August 2010 delivery for the 5-day period ending June 3 averaged $4.47 per MMBtu, and the average implied volatility over the same period was 44 percent. This produced lower and upper bounds for the 95-percent confidence interval of $3.22 and $6.20 per MMBtu, respectively. At this time last year the natural gas August 2009 futures contract averaged $3.87 per MMBtu and implied volatility averaged almost 71 percent. This rendered the lower and upper limits of the 95-percent confidence interval were at $2.21 and $6.76 per MMBtu.
U.S. Electricity Consumption. EIA projects that retail sales of electricity to the residential sector from April through September will grow by 5 percent compared with the same period last year. Retail sales in the Midwest will be particularly strong this summer since the forecast is for temperatures to return to normal levels after a very mild summer last year. Total consumption of electricity across all sectors is projected to grow by 3.1 percent during 2010 and by 0.9 percent next year (U.S. Total Electricity Consumption Chart).
U.S. Electric-Power-Sector Generation. Although the level of electric-power-sector generation from natural gas was 9 percent lower in March compared with the same month last year, EIA expects that electricity generation from natural gas in April and May should prove to have been about 11 percent higher than during the same period of 2009. This growth in generation from natural gas over last year should continue over the next few months until higher natural gas fuel costs begin to favor increased dispatch of coal-fired generation in areas where the two fuels compete closely for the baseload power market.
U.S. Electricity Retail Prices. Estimated residential electricity prices during the first quarter of this year averaged 10.8 cents per kilowatt-hour, down from 11.2 cents during the same period in 2009. However, rising fuel costs for natural gas and coal generation compared with last year are likely to push up retail prices later this year, keeping the annual growth rate for residential electricity prices relatively flat during 2010. Forecast residential electricity prices average 11.6 cents per kilowatthour (kWh) in 2010 and 11.9 cents per kWh in 2011 (U.S. Residential Electricity Prices Chart).
U.S. Coal Consumption. Projected electricity demand growth is the primary cause of the projected 3.9-percent growth in coal consumption in the electric power sector in 2010. Continued electricity demand growth and the projected decline in natural-gas-fired generation results in an additional 2.3-percent increase in electric-power-sector coal consumption in 2011 (U.S. Coal Consumption Growth Chart).
U.S. Coal Supply. EIA projects that coal production will fall by 1.8 percent in 2010 despite increases in domestic consumption and exports lower imports. The balance between production and consumption is satisfied through significant reductions in both producer (14 percent) and end-user inventories (15 percent) (U.S. Electric Power Sector Coal Stocks Chart). EIA projects a 3.8-percent increase in coal production in 2011 to meet continued growth in coal consumption and exports (U.S. Annual Coal Production Chart).
U.S. Coal Trade. U.S. coal imports fell by more than one third in 2009, and the slightly more than 22 million short tons imported was the smallest amount received since 2002. Imports decline another 17 percent in 2010 in this forecast as increased domestic consumption is met by draws on U.S. coal inventories. Projected coal imports grow by 38 percent in 2011, but the annual tonnage (26 million short tons) remains significantly below the 2005-through-2008 average of 34 million short tons.
U.S. Coal Prices. EIA estimates that the 2009 delivered electric-power-sector coal price increased by about 7 percent despite decreases in spot coal prices, lower prices for other fossil fuels, and declines in coal-fired electricity generation. This higher cost of delivered coal reflected the impact of longer-term power‐sector coal contracts that were initiated during a period of high prices for all fuels. The projected electric-power-sector delivered coal price increases slightly (by 1.5 percent) to average $2.24 per MMBtu in 2010, and then declines to an average of $2.18 per MMBtu in 2011.
Carbon Dioxide Emissions
Forecast economic growth combined with increased use of coal in the electric power sector contribute to increases in CO2 emissions from fossil fuels of 2.9 percent and 1.4 percent in 2010 and 2011, respectively (U.S. Carbon Dioxide Emissions Growth Chart). Increased demand for petroleum in the transportation sector (motor gasoline, diesel fuel and jet fuel) also contributes to the increases in fossil-fuel CO2 emissions. However, even with increases in 2010 and 2011, projected CO2 emissions are lower than annual emissions were from 1999 through 2008.