EIA releases its Short-Term Energy Outlook: Highlights

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

Although spot crude oil prices continue to fluctuate on a daily basis, EIA’s projections for West Texas Intermediate (WTI) crude oil spot prices have remained relatively stable over the last four outlook reports. EIA expects WTI prices to average above US$80/bbl this spring, rising to an average of about US$82/bbl by the end of the year and to US$85/bbl by the end of 2011.

Projected economic growth this year is higher in this forecast, with US real GDP growing by 2.8 per cent and world oil-consumption-weighted real GDP growing by 3.4 per cent, compared with 2.3 per cent and 2.7 per cent growth, respectively, in last month’s Outlook. The 2011 forecast for real GDP growth is relatively unchanged at 2.6 per cent and 3.5 per cent for the United States and the world, 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/gal in 2010 and to US$2.96 in 2011 because of the projected rising crude oil prices. Average US pump prices likely will exceed US$3/gal at times during the forthcoming spring and summer driving season. Projected annual average retail diesel fuel prices are US$2.96 and US$3.14/gal, respectively, in 2010 and 2011.

EIA expects this year’s annual average natural gas Henry Hub spot price to be US$5.17/mBtu, a US$1.22/mBtu increase over the 2009 average. EIA projects price rises to continue in 2011, averaging US$5.65 per MMBtu for the year. Projected working gas inventories end the first quarter of 2010 at about 1550bnft³) compared with 1644bnft³ in the previous Outlook because of colder-than-normal weather in February. Natural-gas-weighted heating degree-days were nearly 11 per cent above the 30-year norm last month.

The annual average residential electricity price changes only slightly over the forecast period, averaging US¢11.5/kWh in both 2009 and 2010, and then rising to US¢11.6/kWh in 2011.

CO₂ emissions from fossil fuels, which declined by 6.4 per cent in 2009, increase by 1.5 per cent and 1.2 per cent in 2010 and 2011, respectively, in the forecast as economic growth fuels higher energy consumption.

Global crude oil and liquid fuels

Crude oil and liquid fuels overview. EIA’s more optimistic updated expectation for global economic growth during 2010 drives the 2010 forecast for oil consumption growth upwards to 1.5mbpd from 1.2mbpd in last month’s Outlook. This increased growth in 2010 oil consumption supports a firming of crude oil prices at above US$80/bbl this summer and accommodates a further drawdown of commercial oil inventories. While EIA has also reduced its projections for surplus production capacity in the Organization of the Petroleum Exporting Countries (OPEC), surplus capacity remains ample, dampening the likelihood of a large upward swing in prices.

Global crude oil and liquid fuels consumption. As noted above, the upward adjustment of 0.3mbpd in the 2010 forecast for global liquid fuels consumption growth in this Outlook is largely due to expectations for greater economic growth. Most of the increased economic growth in 2010 is expected in the Asia-Pacific and Middle East regions, thus largely outside of the countries in the Organization for Economic Cooperation and Development (OECD). EIA’s expectations for both economic and oil consumption growth in 2011 remain about the same as in the previous Outlook.

Non-OPEC supply. Non-OPEC supply increased by 590,000bpd in 2009, the largest annual increase since 2004. Non-OPEC supply is projected to increase by 550,000bpd in 2010 before declining slightly in 2011, as declining production in mature areas more than offsets any new production growth. The largest source of supply growth in 2010 is the United States, followed by Brazil, Azerbaijan, and Kazakhstan. Further declines in mature fields in Mexico, the United Kingdom and Norway are expected in 2010.

OPEC supply. The forecast assumes that OPEC does not change its target production levels at its scheduled meeting in mid-March. Given expected oil demand growth in 2010, oil prices should continue to firm despite expected increases in both non-OPEC and OPEC production this year. EIA projects that OPEC production of crude oil and non-crude petroleum liquids, the latter of which are not subject to OPEC production targets, will increase by about 0.4 and 0.6mbpd each year, respectively, about the same as in the previous Outlook. Overall, EIA also projects a slight decrease in OPEC surplus crude oil production capacity from the previous Outlook.

OECD petroleum inventories. EIA has revised its estimate of OECD commercial oil inventories at the end of 2009 downwards to 2.67bnbbl, equivalent to about 57 days of forward cover and about 63mbbl more than the five-year average for the corresponding time of year. OECD oil inventories are still projected to remain at the upper end of the historical range over the forecast period.

Crude oil prices. WTI crude oil spot prices averaged US$76.39/bbl in February 2010, almost US$2/bbl lower than the prior month’s average and very near the US$76/bbl forecast in the previous  Outlook. Last month, the WTI spot price reached a low of US$71.15 on February 5 and peaked at US$80.04 on February 22. EIA expects WTI prices to average above US$80/bbl this spring, rising to an average of about US$82/bbl by the end of the year and to US$85/bbl by the end of 2011.

Following a slight increase in expected WTI price volatility early in February, implied volatility trended lower through the rest of the month, continuing a trend begun in the fourth quarter of 2009. Over the five-day period ending March 4, May 2010 WTI futures averaged US$80.21/bbl. Over the same five-day period, the lower and upper limits for the 95-per cent confidence interval for May 2010 futures were US$65 and US$99/bbl, respectively, based on the May 2010 implied volatility, calculated from New York Mercantile Exchange (NYMEX) near-the-money options on WTI futures.

One year ago, WTI delivered into Cushing, Oklahoma, in May 2009 averaged about US$45/bbl and implied volatility, at 74 per cent, was more than twice the rate now trading in the options markets. The 95-per cent confidence interval for May 2009 WTI futures thus had lower and upper limits of US$28 and US$75/bbl, respectively.

US crude oil and liquid fuels

US liquid fuels consumption. US liquid fuels consumption declined by 810,000bpd (4.2 per cent) to 18.7mbpd in 2009, the fourth consecutive annual decline. Motor gasoline was the only major petroleum product of which annual consumption did not decline. Distillate fuel consumption declined by 310,000bpd (eight per cent) in 2009, led by a sharp economy-related decline in transportation usage.

The economic recovery contributes to projected growth in total liquid fuels consumption of 200,000bpd in 2010 and 210,000bpd in 2011. Nevertheless, expected US consumption in 2011 is lower than total consumption was in 1999 and is 1.7mbpd lower than the highest level of annual consumption reached in 2005.

EIA projects gasoline consumption will begin to show modest, but consistent, increases over the previous year, growing by 60,000bpd in 2010 and 70,000bpd in 2011. Projected distillate fuel consumption begins showing year-over-year growth this month, with an increase in average annual consumption of 20,000bpd and 90,000bpd in 2010 and 2011, respectively. However, this forecast for recovery in distillate fuel consumption remains highly uncertain because of the continuing observed weak diesel fuel demand.

US liquid fuels supply and imports. Domestic crude oil production averaged 5.32mbpd in 2009, up about 370,000bpd from 2008. Projected growth in domestic crude oil production is more moderate in 2010, increasing by about 210,000bpd. Production growth in 2011 slows sharply to 20,000bpd, as substantial declines in the Federal Gulf of Mexico and Alaska almost offset gains in lower-48 on-shore production.

Ethanol production continues to grow to meet the volume requirements of the Renewable Fuel Standard. Ethanol production, which averaged 700,000bpd in 2009, increases to an average of 800,000bpd in 2010 and 850,000bpd in 2011 in the forecast.

The decline in liquid fuels consumption in 2009 along with growth in domestic crude oil and ethanol production led to a 1.4mbpd drop in total liquid fuel net imports (including both crude oil and refined products). EIA forecasts that total liquid fuel net imports will fall by 150,000bpd in 2010 and then rise by 100,000bpd in 2011.

US petroleum product prices. Regular-grade gasoline prices averaged US$2.35/gal in 2009, increasing from an average of 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$2.96/gal in 2011. Average regular-grade pump prices likely will exceed 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$2.96/gal in 2010 and US$3.14 in 2011 in this forecast. As with motor gasoline, the forecast recovery in the consumption of diesel fuel in the United States, as well as growth in distillate fuel usage outside the United States, slowly strengthens refining margins for distillate throughout the forecast period.

Natural gas

US natural gas consumption. EIA expects total natural gas consumption to increase by 0.7 per cent to 62.9bnft³pd in 2010 and decline by 0.4 per cent in 2011 (Total US Natural Gas Consumption Growth Chart). Cold weather drives this year’s natural gas consumption increases. Total natural-gas-weighted heating degree-days during the first 2 months of this year were 5.5 per cent above the 30-year normal level and the highest for the period since 2004.

The combination of frigid temperatures and electric space heating in the Southeast contributed not only to increases in residential and commercial sector natural gas consumption but also to very strong natural gas consumption in the electric power sector. Even with the assumption of near-normal weather in March, EIA expects first-quarter natural gas use in the electric power sector to increase by about three per cent above the same period last year and about 17 per cent above the previous five-year average. This increase in first quarter 2010 electric power sector consumption has all but eliminated the projected 1.3-per cent YoY decline in natural gas consumption for this sector in last month’s Outlook.

The 2011 outlook for a small decline in total natural gas consumption reflects the projected return to near-normal weather, which is expected to reduce consumption in the residential, commercial, and electric power sectors. Continued economic recovery contributes to a projected 2.1-per cent increase in natural gas consumption in the industrial sector.

US natural gas production and imports. EIA expects total marketed natural gas production to decline by 2.7 per cent to 58.7bnft³pd in 2010 and increase by 1.1 per cent in 2011. The number of working natural gas rigs has been increasing this year in response to higher prices in both the spot and forward markets. According to Smith International, natural gas rigs have increased by more than 17 per cent, or by nearly 140, since the start of this year. There are currently almost 570 working horizontal rigs, a new record. EIA still anticipates a decline in 2010 production because of the lag time arising from low drilling rates last year and steep decline rates associated with newly- drilled wells. However, continued recovery of drilling rig activity, increasing drilling efficiency, and the potential for higher production rates from shale gas wells could lead to higher-than-expected production this year and next.

EIA expects US net imports to be slightly higher in 2010 as a projected decline in pipeline imports is offset by lower exports and higher imports of liquefied natural gas (LNG). While cold weather across the northern hemisphere has helped absorb some of the new LNG supply that has recently come on-stream, US LNG imports are forecast to increase by nearly 0.8bnft³pd over last year in the first quarter 2010. For 2010 as a whole, US LNG imports are forecast to increase by about 45 per cent (or 0.56bnft³pd). As global LNG demand and import capacity expand next year, EIA expects US LNG imports to show little year-over-year growth in 2011.

US natural gas inventories. On February 26, 2010, working natural gas in storage was 1,737bnft³ (US Working Natural Gas in Storage Chart), 21bnft³ above the previous five-year average (2005–09) and 71bnft³ below the level during the corresponding week last year. Persistent cold weather so far this year has taken a toll on inventories. The estimated total inventory withdrawal in January and February is 1,406bnft³. The five-year average withdrawal for these two months is 1,159bnft³. EIA now expects working natural gas inventories to finish the first quarter of 2010 at around 1,549bnft³, or about 3.5 per cent above the previous five-year average. In addition, resilient domestic production and higher US LNG imports contribute to a projected end-of-October 2010 inventory that remains above the previous five-year average.

US natural gas prices. The Henry Hub spot price averaged US$5.32/mBtu in February, US$0.51/mBtu lower than the average spot price in January and US$0.14/mBtu lower than the forecast for February in last month’s Outlook. Historically, colder-than-normal weather and correspondingly high demand has contributed to large storage withdrawals and elevated prices during the winter. For example, similar natural-gas-weighted heating degree-days and working natural gas storage withdrawals were recorded in January and February of this year and in 2003. While the cold weather in 2003 contributed to a 63-per cent increase in the monthly average spot price from December 2002 to February 2003, the monthly average spot price in February 2010 was virtually unchanged from the average price in December 2009.

Much of the subdued price action this winter is attributable to the level of, as opposed to the change in, working inventories. By the end of February 2003, working stocks stood at 851bnft³ compared with an estimated 1,729bnft³ this February. Prices may strengthen slightly in the coming months as demand to rebuild natural gas in storage from risk-averse local distribution companies begins. However, the potential for higher domestic production, increasing LNG supply, and limited consumption growth all reduce the possibility of sustained high prices as inventories are replenished over the next several months. The Henry Hub spot price forecast averages US$5.17/mBtu in 2010 and US$5.65/mBtu in 2011.

Volatility in the April and May 2010 futures and options markets trended lower over the last month. For the five-day period ended March 4, May futures averaged US$4.77/mBtu, while the lower and upper limits of the 95-per cent confidence interval calculated based on the implied volatility calculated from near-the-money options were US$3.57 and US$6.39/mBtu, respectively. A year earlier, natural gas delivered to the Henry Hub in May 2009 was trading at US$4.30/mBtu, with lower and upper limit for the 95-per cent confidence interval calculated based on implied volatility of US$2.80 and US$6.60/mBtu, respectively.

Electricity

US electricity consumption. EIA’s assumption of 5.5 per cent growth in manufacturing output during 2010 translates to an expected growth in electricity sales to the industrial sector of about one per cent. EIA forecasts electricity sales to the residential sector to grow by 3.5 per cent during 2010 since summer temperatures this year are expected to return to their normal levels after a relatively cool summer last year. Total consumption of electricity across all sectors is expected to grow by 2.0 per cent during 2010 and by 1.5 per cent next year.

US electricity generation. Natural gas generation during January and February was estimated to be about 10 per cent higher than the same months last year because of the cold weather experienced in the South. This higher-than-expected level of natural gas generation during the early part of this year will pull up the projected 2010 annual growth rate to 0.6 per cent, in contrast to the relatively flat growth projected in last month’s Outlook.

US electricity retail prices. The estimated average US residential electricity price during 2009 was about US¢11.5/kWh. EIA projects US residential electricity prices will be about the same in 2010, followed by an increase of 1.4 per cent in 2011 resulting primarily from higher natural gas generation fuel costs.

Coal

US coal consumption. Anticipated increases in electricity demand and higher natural gas prices will contribute to modest growth in coal-fired generation in 2010 and 2011. Forecast coal consumption in the electric power sector increases by about three per cent in 2010, though staying under 1bst. 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.

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 seven 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 end-user (secondary) inventories. EIA projects a seven per cent increase in coal production in 2011 to meet continued growth in coal consumption and exports as existing inventories are reduced.

US coal prices. EIA estimates that the 2009 delivered electric-power-sector coal price increased by nearly 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 reflects 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 falls by almost six per cent to average US$2.08/mBtu in 2010 and declines by an additional 2.4 per cent in 2011.

US carbon dioxide emissions

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 transportation-related petroleum consumption, lead to a 1.2-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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