EIA releases its Short Term Energy Outlook: Highlights

The US Energy Information Agency (EIA) has released its monthly Short Term Energy Outlook. Here are the edited highlights:

Crude oil prices continue to fluctuate. The West Texas Intermediate (WTI) spot price increased from US$69.48/bbl on December 14 to US$83.12 on January 6 and then fell to US$72.85 on January 29. EIA expects the crude oil market to strengthen again this spring with WTI rising to an average of about US$81/bbl over the second half of this year and US$84/bbl in 2011. The crude oil price forecast is unchanged from last month’s Outlook. EIA’s forecast assumes that US real GDP grows by 2.3 per cent in 2010 and by 2.5 per cent in 2011, while world oil-consumption-weighted real GDP grows by 2.7 per cent and 3.6 per cent in 2010 and 2011, respectively.

EIA forecasts that the annual average regular-grade retail gasoline price will increase from US$2.35/gal in 2009 to US$2.84 in 2010 and US$2.97 in 2011 because of the rising average crude oil price forecast. Pump prices may exceed US$3/gal at times during the approaching spring and summer. Projected annual average retail diesel fuel prices are US$2.95 and US$3.16/gal, respectively, in 2010 and 2011.

EIA expects this year’s annual average natural gas Henry Hub spot price to be US$5.37/MMBtu, a US$1.42/MMBtu increase over the 2009 average of US$3.95. EIA projects continuing price increases in 2011, averaging US$5.86/MMBtu for the year. EIA envisages working gas inventories to end the first quarter at about 1,644/bnft³ compared with 1,734/bnft³ in the previous Outlook, because of colder-than-normal weather in early January.

The annual average residential electricity price changes only slightly over the forecast period, falling from US¢11.6/KWh in 2009 to 11.5 cents in 2010, and then rising to US¢11.7/KWh in 2011. These projections are unchanged from the previous Outlook.

Projected CO₂ emissions from fossil fuels, which declined by 6.3 per cent in 2009, will increase by 1.5 per cent and 1.3 per cent in 2010 and 2011, respectively, as economic recovery contributes to higher energy consumption.

Global crude oil and liquid fuels

Crude oil and liquid fuels overview
The world oil market should gradually tighten in 2010 and 2011 as the global economic recovery continues and world oil demand begins to grow again. Continuation of the production targets set by the Organization of the Petroleum Exporting Countries (OPEC), as well as lower overall growth in non-OPEC supply over the 2010-11 forecast period, would also contribute to a firming of crude oil prices to above US$80/bbl this summer. However, the combination of high commercial inventories among members of the Organization for Economic Cooperation and Development (OECD) and ample OPEC surplus production capacity should help dampen the likelihood of any large upward swings in prices.

Global crude oil and liquid fuels consumption
EIA has revised upward slightly its projections for global liquid fuels consumption growth in this Outlook as the Asian-led recovery continues. China’s apparent liquid fuels consumption in December increased by 0.9mbpd (bbl/d), or 12 per cent, above year-earlier levels a its economic stimulus package continued to help push up both oil usage and economic growth. While Japan is expected to continue its long-term decline in consumption, signs of an economic turnaround in that country lead EIA to be less pessimistic about the Japanese decline in liquid fuels consumption for 2010-11. EIA’s revised outlook is for global liquid fuels consumption to grow by 1.2mbpd in 2010 and 1.6mbpd in 2011 after showing annual declines in 2008 and 2009. Non-OECD countries are expected to account for the majority of this growth in both 2010 and 2011.

Non-OPEC supply
Non-OPEC supply increased by 560,000bpd in 2009, the largest annual increase since 2004. However, EIA does not expect this level of supply growth to continue during the forecast period. Non-OPEC supply is projected to increase by 430,000bpd in 2010. The largest source of growth in 2010 is the United States, followed by Brazil and Azerbaijan. Offsetting this growth, production is forecast to decline in Mexico, the United Kingdom and Norway. Non-OPEC supply is expected to fall by 120,000bpd in 2011, as declining production in mature areas overwhelms any new production growth.

OPEC supply
OPEC cut its crude oil production by 2.2mbpd in 2009, one reason why WTI crude oil prices stabilised between US$70-80/bbl since the middle of last year. This range is consistent with the “fair price” range for crude oil proposed by King Abdullah of Saudi Arabia at the beginning of 2009. Oil prices hovered in this range despite sustained high levels of oil inventories and rising spare production capacity, which rose, in part, because of cuts in OPEC production. OPEC surplus crude oil production capacity currently stands at about 5mbpd and could grow to 6mbpd by the end of the forecast period. However, most of this surplus capacity is concentrated in Saudi Arabia, which is not likely to use it as long as the oil market is stable and its price target range is being met. In contrast, OPEC surplus crude oil production capacity averaged 2.8mbpd during the 1999-2009 period.

EIA expects annual OPEC crude oil production will increase by an average of 0.4mbpd in 2010 and again in 2011 as global oil demand recovers. In addition, EIA expects OPEC non-crude petroleum liquids, which are not subject to OPEC production targets, to grow by 0.6 to 0.7mbpd each year through 2011, for a total of up to 2.2mbpd of increased OPEC liquids production over the next two years. OPEC is scheduled to meet in Vienna on March 17, 2010, to reassess market conditions.

OECD petroleum inventories
EIA estimates OECD commercial oil inventories were 2.69bnbbl at the end of 2009, equivalent to about 58 days of forward cover, and about 90mbbl more than the five-year average for the corresponding time of year. Projected OECD oil inventories remain at the upper end of the historical range over the forecast period.

Crude oil prices
WTI crude oil spot prices averaged US$78.33/bbl in January 2010, almost US$4/bbl higher than the prior month’s average and matching the US$78-per-barrel forecast in last month’s Outlook. The WTI spot price peaked at US$83.12 on January 6 and then fell to US$72.85 on January 29 as the weather turned warm and concerns about the strength of world economic recovery increased. EIA forecasts that WTI spot prices will remain near current levels over the next few months, averaging US$76/bbl in February and March, before rising to about US$82/bbl in the late spring and to US$85 by late next year.

Expected WTI price volatility was fairly steady over the month. April 2010 implied volatility (based on options prices) averaged 35 per cent per annum during January, and, over the five days ending February 4, 2010, it was slightly over 34 per cent. April 2010 WTI futures averaged US$75/bbl over that same five-day window, yielding a lower and upper limit for the 95-per cent confidence interval of US$60 and US$94/bbl, respectively.

One year ago, April-delivered WTI into Cushing, Oklahoma, was priced at US$45/bbl, and implied volatility, at 74 per cent, was more than twice the rate now trading in the options markets. Thus, the 95-per cent confidence interval for April 2009 WTI futures had lower and upper limits of US$28 and US$72/bbl at that time, respectively.

US crude oil and liquid fuels

US liquid fuels consumption
US liquid fuels consumption declined by 820,000bpd (4.2 per cent) to 18.7mbpd in 2009, the second consecutive annual decline. Motor gasoline was the only major petroleum product whose annual consumption did not decline, having remained relatively unchanged. Distillate fuel consumption declined by 330,000bpd (8.4 per cent), in 2009, led by a sharp economy-related decline in transportation usage. Jet fuel usage fell by 130,000bpd (8.6 per cent).

Despite the cold weather that gripped much of the country in late December 2009 and early January 2010, total US liquid fuels consumption in those two months still fell below the levels seen in the same months a year earlier. Nevertheless, EIA projects that total petroleum products consumption will rise by 180,000bpd in 2010 because of the economic recovery that began in late 2009. All major products contribute to that increase. The projected continuing economic recovery in 2011 boosts total petroleum products consumption by 210,000bpd. Motor gasoline consumption increases by 70,000bpd and distillate consumption rises by 100,000bpd in 2011. Throughout the forecast, continued increases in aircraft efficiencies result in flat jet-fuel consumption despite growth in air activity.

US liquid fuels supply and imports
Domestic crude oil production averaged 5.32mbpd in 2009, up 370,000bpd from 2008. Projected growth in domestic output is slower in 2010, increasing by about 190,000bpd, and then falls slightly in 2011 by 30,000bpd. Ethanol production continues to grow to meet the volume requirements of the Renewable Fuel Standard. Projected ethanol production, which averaged 700,000bpd in 2009, increases to an average of 800,000bpd in 2010 and 850,000bpd in 2011. EIA forecasts that liquid fuel net imports (including both crude oil and refined products) will fall by 150,000bpd in 2010 and then rise by 160,000bpd in 2011, after having fallen by 1.42mbpd during 2009.

US petroleum product prices
Monthly average regular-grade gasoline prices averaged US$2.35/gal in 2009, increasing from US$1.79/gal in January 2009 to US$2.61/gal in December. EIA expects these prices will average US$2.84/gal in 2010 and US$2.97/gal in 2011. Gasoline retail prices have followed crude oil prices over the last few months with the troughs and peaks in gasoline prices following those of crude oil by about one week. Average regular-grade pump prices may top US$3/gal at times during the upcoming spring and summer and will easily pass that benchmark in high-cost regions, such as the West Coast. Due to forecast growth in motor gasoline consumption, the difference between the average gasoline retail price and the average cost of crude oil increases slightly in both 2010 and 2011.

On-highway diesel fuel retail prices, which averaged US$2.46/gal in 2009, average US$2.95/gal in 2010 and US$3.16 in 2011 in this forecast. As with motor gasoline, the expected recovery in the consumption of diesel fuel in the US, as well as growth in distillate fuel usage outside the country, strengthens refining margins for distillate throughout the forecast period.

Natural gas

US natural gas consumption
EIA expects total natural gas consumption to increase 0.4 per cent to 62.5/bnft³ per day (Bcf/d) in 2010 and another 0.4 per cent in 2011. Very cold weather during the first half of January, particularly in the Southeast, contributed to an 8.4-per cent jump in the monthly estimate for electric-power-sector natural gas consumption from the previous forecast. The latest estimate for electric-power-sector consumption in January would be a new record for the month. Although natural gas consumption in the electric power sector has been strong so far this year, an increase in coal-fired generation capacity and higher natural gas prices through the remainder of the year should reduce the share of natural-gas-fired generation in the baseload power mix in 2010. This is despite lower-than-normal snowpack in the Northwest, which we expect to reduce hydroelectric generation in that region in 2010 to about eight per cent below last year’s level and boost natural gas consumption. The projected 1.3 per cent decline in electric-power-sector natural gas use is offset by growth in the residential, commercial and industrial sectors in the 2010 forecast. The outlook for growth in total natural gas consumption in 2011 comes from increases in the industrial sector as a result of improved economic conditions.

US natural gas production and imports
Total marketed natural gas production declines 2.6 per cent to 58.7/bnft³/d in 2010 and increases by 1.3 per cent in 2011 in this forecast. Working natural gas rigs hit a low of 665 in mid-July 2009, and EIA anticipates that the impact of lower drilling activity last year will contribute to the production decline in 2010. While the number of working natural gas rigs is currently about 25 per cent below the year-ago level, the number has increased during the last month by about 100 rigs to a total of 861 rigs at the end of January. Current 2010 futures market prices between US$5.50 and US$6.70/MMBtu appear to provide the necessary economic incentive to expand drilling programmes even further. As a result, EIA expects monthly natural gas production to begin to slowly increase later this year and continue on an upward trend through the end of 2011.

Projected US pipeline imports decline by 8.3 per cent (0.7/bnft³pd) to 8.1/bnft³pd in 2010 due to the sustained impact of lower Canadian drilling activity and production, as well as increasing demand from oil sands projects in western Canada. A portion of the decline in pipeline imports this year is expected to be offset by imports of liquefied natural gas (LNG), which were double year-ago levels in January as temperatures plummeted and prices jumped. The outlook for higher US LNG imports in 2010 is largely due to recent global LNG supply additions in Russia, Yemen, Qatar, and Indonesia. EIA expects net imports of natural gas to decline in 2011 as flows from Canada remain limited and global demand for LNG strengthens.

US natural gas inventories

On January 29, 2010, working natural gas in storage was 2,406/bnft³, 150/bnft³ above the previous five-year average (2005–09) and 199/bnft³ above the level during the corresponding week last year. Colder-than-normal temperatures in the first half of January led to the largest consecutive-week withdrawal on record as a total of 511/bnft³ was pulled from storage during the weeks ending January 8 and 15. The withdrawals over these two weeks were a combined 317/bnft³ above the average withdrawal for the corresponding weeks over the previous five years. However, weather turned considerably warmer during the second half of January, and working gas stocks over the last two weeks fell by 201/bnft³, compared with the previous five-year average withdrawal of 357/bnft³. Despite the large inventory draws in December and early January, EIA expects working gas inventories to finish the first quarter of 2010 at about 1,644/bnft³, or seven per cent higher than the previous five-year average.

US natural gas prices

The Henry Hub spot price averaged US$5.83/MMBtu in January 2009, US$0.49/MMBtu higher than the average spot price in December and US$0.36/MMBtu higher than the forecast for January in last month’s Outlook. The Henry Hub spot price peaked at US$7.51/MMBtu on January 7, as colder-than-normal weather tightened its grip on much of the country. When temperatures eased the price fell to about US$5.30/MMBtu by the end of the month. While the early cold spell contributed to a substantial withdrawal from working natural gas inventories, prices are projected to reflect an end-of-winter storage level that is still above the five-year average. The relatively high inventory level combined with the increased supply potential from domestic resources should keep prices from rising dramatically this year. However, in addition to anomalous weather, unforeseen consumption increases in the electric power and industrial sectors could elevate prices above the current forecast. The Henry Hub spot price forecast averages US$5.37/MMBtu in 2010 and US$5.86/MMBtu in 2011.

Both March and April implied volatilities based on natural gas futures market options contracts started the month in the 55-to-60 per cent range and finished the month slightly below 50 per cent. Implied volatility for April natural gas options averaged 46 per cent per annum for the five days ending February 4, 2010. With the average April delivery price at US$5.35/MMBtu for the five days ending February 4, the lower and upper limits of the 95 per cent confidence interval were US$3.80 and US$7.50/MMBtu, respectively.

Natural gas delivered to the Henry Hub during April 2009 was trading at US$4.60/MMBtu at this time last year. Options market participants were pricing the April 2009 implied volatility at 60 per cent, producing a lower and upper limit for the 95-per cent confidence interval of US$3 and US$7/MMBtu, respectively.

Electricity

US electricity consumption
January heating degree-days in the South Census Region, where about 60 per cent of households use electricity as their primary space heating fuel, were 13 per cent higher than in January 2009. Consequently, residential electricity sales in the South region also increased by about 12 per cent to an average of 2250GWhpd. Temperatures across the United States this summer are expected to be about 2.5 per cent cooler than last summer, limiting overall growth in electricity sales. Projected total US consumption of electricity grows by 1.9 per cent in 2010 and by 1.7 per cent in 2011.

US electricity generation
The large increase in South Atlantic electricity consumption during January was likely supplied in large part by natural gas generation. In addition, low snowpack levels in the Pacific Northwest are likely to reduce hydropower generation and boost natural gas consumption as noted previously. However, offsetting these increases, the projected higher price of natural gas compared with last year reduces its attractiveness as a baseload fuel. The projected 1.6 per cent decline in natural gas consumption for electricity generation in 2010 is lower than the 3.0 per cent decline in last month’s Outlook.

US electricity retail prices
The estimated November 2009 US residential electricity price was US¢11.2/KWh, 2.4 per cent lower than November 2008. EIA projects US residential electricity prices will fall by 1.0 per cent in 2010, followed by an increase of 1.9 per cent in 2011 resulting primarily from higher natural gas generation fuel costs.

Coal

US coal consumption
Estimated coal consumption by the electric power sector fell by more than 10 per cent in 2009, a slightly larger decline than estimated in last month’s Outlook. The most recent consumption estimate for November 2009 is nearly eight per cent lower than was expected in last month’s Outlook. Anticipated increases in electricity demand and higher natural gas prices, both of which are higher than in the previous Outlook, will contribute to modest growth in coal-fired generation in 2010 and 2011. Forecast coal consumption in the electric power sector increases by almost four per cent in 2010, though staying under 1bnst. EIA projects coal consumption in the electric power sector will increase by 1.6 per cent in 2011, but remain below the 1bnst level for the third consecutive year. Consumption of coal at coke plants rises over the forecast period as economic conditions improve, increasing by nearly 6mst (38 per cent) in 2010, followed by a small increase (less than one per cent) in 2011. A higher forecast for raw steel production is the primary reason for higher coke plant consumption than in the previous Outlook.

US coal supply
EIA estimates that 2009 coal production fell by nearly eight per cent in response to lower US coal consumption, fewer exports, and higher coal inventories. Production declines by an additional four per cent in 2010 in this forecast despite increases in domestic consumption and exports. The balance between production and consumption is satisfied through significant reductions in both producer and end-user inventories. EIA projects a 5.4-per cent increase in coal production in 2011 to meet continued growth in coal consumption and exports.

US coal prices
EIA estimates that the 2009 delivered electric-power-sector coal price increased by seven per cent in 2009 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 is due to the significant portion 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 falls by almost eight per cent to average US$2.04/MMBtu in 2010 and declines by an additional 1.6 per cent in 2011.

US carbon dioxide emissions
CO₂ emissions from fossil fuels fell by an estimated 6.3 per cent in 2009. Emissions from coal led the drop in 2009 CO₂ emissions, falling by nearly 11 per cent. Declines in energy consumption in the industrial sector (a result of the weak economy) and changes in electricity generation sources are the primary reasons for the decline in CO₂ emissions. Looking forward, projected improvements in the economy contribute to an expected 1.5-per cent increase in CO₂ emissions in 2010. Increased use of coal in the electric-power sector, and continued economic growth, combined with the expansion of travel-related petroleum consumption, lead to a 1.3-per cent increase in CO₂ emissions in 2011. However, even with increases in 2010 and 2011, projected CO₂ emissions in 2011 are lower than annual emissions from 1999 through 2008.

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