Short-Term Energy and Summer Fuels Outlook

WASHINGTON, DC – April 8, 2008 – To see details of this forecast update, go to the following World Wide Web site on the Internet: http://www.eia.doe.gov/emeu/steo/pub/contents.html      

Highlights

• West Texas Intermediate (WTI) crude oil prices, which averaged $72.32 per barrel in 2007, are projected to average $101 per barrel in 2008 and $92.50 per barrel in 2009.
• The projected higher costs for crude oil will contribute to higher petroleum product prices.  Motor gasoline prices are projected to average $3.36 per gallon in 2008, up 55 cents from last year.  Diesel prices are projected to show even larger increases in 2008, averaging $3.62 per gallon, or 74 cents above the 2007 average price.  The monthly average gasoline price is projected to peak at about $3.60 per gallon this spring, while monthly diesel prices are expected to average about $3.90 per gallon in March and April.  Weekly diesel prices have already crossed the $4.00-per-gallon threshold in many regions of the country.
• U.S. consumption of liquid fuels and other petroleum is expected to decline in 2008 by about 85,000 barrels per day (bbl/d) as a result of the economic slowdown and high petroleum prices.  After accounting for increased ethanol use, U.S. petroleum consumption is projected to fall by 210,000 bbl/d in 2008.  
• U.S. real gross domestic product (GDP) is expected to decline in the first half of the year and then start growing again, with annual growth in 2008 at 1.2 percent, the slowest annual rate since 2001.  An expected modest economic recovery in 2009, combined with lower petroleum prices is projected to boost total U.S. liquid fuels and other petroleum consumption by about 200,000 bbl/d.
• The Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is expected to average $8.59 per Mcf in 2008 and $8.32 per Mcf in 2009.  Higher prices this year and next reflect continued strong demand, high oil prices, and the need to replenish more stocks this year than last year.

 

Global Petroleum  

The global oil market remains fundamentally tight entering the second quarter, despite a slowdown in U.S. oil consumption and growing risks to global economic growth.  The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices.  The flow of investment money into commodities has contributed to crude oil price volatility.  Inventories are improving in the Organization for Economic Cooperation and Development (OECD) countries, but given the lack of surplus capacity and geopolitical concerns in Nigeria, Venezuela, and Iraq, a higher level of commercial inventories is desirable.  The magnitude, breadth, and duration of any global economic slowdown will certainly influence market conditions over the near term.  The increase in non-Organization of the Petroleum Exporting Countries (OPEC) production in the second half of the year, however, is expected to contribute to increases in OPEC surplus crude oil production capacity and ease upward price pressures toward the end of the year (discussed further below).

Consumption. World oil consumption is expected to grow by 1.2 million bbl/d in 2008.  Non-OECD countries are expected to account for over 1 million bbl/d of world consumption growth, while OECD consumption is expected to climb by 90,000 bbl/d.  Higher oil prices and slower economic growth have dampened consumption in the United States, but available partial data indicate global oil consumption is still increasing because of continued growth in China, India, Russia, and the Middle East oil-exporting countries.  In March, China’s oil majors were reportedly rationing diesel fuel in parts of the country.

Non-OPEC Supply. Growth in non-OPEC supply is projected to be 0.6 million bbl/d in 2008, lower than last month’s assessment, because of revisions to recent historical data and delays in new oil projects.  Brazil, Azerbaijan, and Sudan are expected to account for most of the net additions to capacity, while the United Kingdom, Mexico, and Norway are among countries expected to experience declines.  The bulk of the supply growth is weighted toward the second half of the year, with non-OPEC supply growth projected to rise by 1.1 million bbl/d in the second half of 2008 (compared with year-earlier levels), versus growth of 80,000 bbl/d in the first half of the year. Given recent history, EIA recognizes that the pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects, thus, production increases could be less than the current forecast.

OPEC Supply. OPEC crude oil production is expected to average 32.3 million bbl/d during the first quarter of 2008, or about 700,000 bbl/d above fourth quarter 2007 levels.  The increase since the end of 2007 mainly reflects higher production from Saudi Arabia, Angola, and the United Arab Emirates.  Based on EIA projections of consumption and non-OPEC supply, OPEC crude oil production is expected to increase during the summer and then dip in the second half of the year.  If consumption rises more slowly than expected and OECD inventories climb substantially relative to historic levels, OPEC members would likely consider holding their output below the projected level.  Based on country capacity expansion plans and projected production, EIA expects that OPEC surplus production capacity will increase slightly in 2008 but remain concentrated in Saudi Arabia.

Inventories. OECD commercial inventories stood at 2.58 billion barrels at the end of 2007, 53 million barrels higher than reported in the last Outlook due to revised historic data.  The improved stock situation mostly reflects lower-than-expected fourth quarter oil consumption in OECD Europe and Asia.  In the first quarter of 2008, OECD commercial inventories are expected to decline only slightly, in contrast to an average 400,000 bbl/d draw over the past 5 years.  Total U.S. inventories, which represent about 40 percent of total OECD stocks, rose by 1 million barrels during the first quarter, compared with an average decline of 26 million barrels over the same period during the previous 5 years.  The normal seasonal decline in U.S. stocks was held in check by the weak U.S. gasoline market, with gasoline inventories increasing by 9 million barrels during the first quarter compared with the previous 5-year average decline of 6 million barrels.  As a result, OECD commercial stocks could enter the summer almost 50 million barrels above the 5-year average.  If expected oil production and consumption levels in the second half of 2008 materialize, total OECD commercial inventories should remain above the 5-year average for the rest of the year. 

 

U.S. Petroleum

Production.  In 2007, domestic crude oil output averaged 5.1 million bbl/d, unchanged from 2006, and is projected to decline only slightly in 2008.  In 2009, however, production is projected to grow by 3.9 percent, or about 200,000 bbl/d, mainly because of the start-up of the Thunder Horse and Tahiti platforms in the Gulf of Mexico.

Consumption.  Total petroleum consumption of liquid fuels and other petroleum products averaged 20.7 million bbl/d in 2007, essentially unchanged from 2006.  Based on the projections of weak economic growth and record high crude oil and product prices, consumption of liquid fuels and other petroleum products is projected to decline by 90,000 bbl/d in 2008—a sharp reversal from the 40,000 bbl/d increase projected in the previous Outlook—then increase by 200,000 bbl/d in 2009.&nb
sp; After accounting for projected increases in domestic ethanol production, U.S. petroleum consumption is projected to fall by 210,000 bbl/d this year.  Gasoline consumption is projected to decline by 0.3 percent this year but increase by 0.9 percent in 2009.  Distillate fuel consumption projected to shrink by 0.2 percent in 2008 before rising by 1.5 percent in 2009.

Crude Oil Prices.   WTI crude oil prices, which averaged $72.32 per barrel in 2007, are projected to average $101 per barrel in 2008  and $92.50 per barrel in 2009.

A significant uncertainty in this Outlook is the WTI crude oil price projection.  Price sensitivity is a characteristic of the current tight petroleum markets.  Any real or perceived disturbance to petroleum demand or supplies, such as unusual weather, unscheduled refinery disruptions, or geopolitical uncertainty in oil-exporting regions, can result in large price increases in a short period of time.  Prices can fall as rapidly under a different set of circumstances, such as easing of geopolitical tensions or further weakening of U.S. and world economic growth.

The last few months provide a good example of oil price volatility.  Between mid‐November 2007 and early December, the spot price of WTI crude oil fell by almost $12 per barrel from $99.16 per barrel on November 20 to a low of $87.45 per barrel on December 5, then rebounded by January 2 to $99.64 per barrel.  By early February the WTI price was back down to $87.16, but then rose steadily to over $110 per barrel on March 13.  The monthly average WTI price for March 2008 was $105.46 per barrel and is expected to average near $100 per barrel through the rest of this year.

 

Summer Fuels Outlook

The current record high prices for both crude oil and product prices belie the weakness in U.S. product demand.  This weakness is expected to be a prominent feature of the summer driving season, defined as the period from April 1 to September 30.

Prices.  Regular grade gasoline retail prices, which averaged $2.93 per gallon last summer, are projected to average $3.54 per gallon during the current driving season.  Diesel fuel prices, which averaged $2.85 per gallon last summer, are projected to average $3.73 this summer.  The monthly average gasoline price is projected to peak at just over $3.60 per gallon in June, while the monthly average diesel price is expected to peak at just over $3.90 per gallon in April.

These retail price projections reflect higher prices for the refiner’s average acquisition cost of crude oil, projected to average almost $97 per barrel, up from about $67 per barrel last summer.  However, for motor gasoline these projections indicate a narrowing of the difference between the gasoline retail price and the average cost of crude oil, due largely to the weak gasoline demand, high inventories, and growth in ethanol production.  While the average cost of crude oil is projected to increase by about 70 cents per gallon this summer over last, the average gasoline retail price is expected to increase by only 60 cents.  In contrast, summer diesel fuel prices are projected to increase by 87 cents per gallon this summer over last, largely because of strong world distillate demand growth, especially in Europe and Asia.

It is important to note, however, that even if the national average monthly gasoline price peaks around $3.60 per gallon this summer, it is possible that prices at some point will cross the $4 per gallon threshold.  There are several reasons why this may occur:

1. Variations around the monthly average.  Daily or weekly national average prices will inevitably be both above and below the monthly average price, whatever it turns out to be.  For example, in May 2007, the average monthly retail price for regular gasoline was nearly $3.15 per gallon, but the weekly price within that month increased from $3.05 per gallon at the beginning of the month to $3.22 per gallon by the end.
2. Variations across States.  There is also significant regional variation in gasoline retail prices because of different gasoline quality specifications, distribution costs, and taxes.  For example, prices along the West Coast—and more specifically, California—are often well above the U.S. average price.  On March 31, 2008, the U.S. average price was nearly $3.29 per gallon, while the average price in California was $3.61 per gallon, or 32 cents above the U.S. average.  In other periods, it has been the Midwest that has seen prices well above the U.S. average.
3. Variations within States. Finally, there is significant variation in prices between stations and areas within any State.  For example, during the first 3 months of 2008 the price of gasoline in San Francisco has been about 10 cents per gallon higher than the California average.
    

Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are driven primarily by the change in crude oil prices and wholesale margins.  The projected average WTI crude oil price for May and June is about $103 per barrel.  Assuming no change in margins, an additional dollar in the oil price adds about 2.4 cents to product prices.  Crude oil prices have been highly volatile in recent months. Oil prices significantly above the projected level would greatly increase the prospects for $4 per gallon gasoline in some parts of the country.  Local supply conditions will also play a key role in determining prices in various regions and locations this spring and summer. 

Motor Gasoline.  During the summer season, motor gasoline consumption is projected to decline by 0.4 percent to 9.4 million bbl/d as a result of the current economic slowdown and high retail prices.  The economic stimulus payments, which are scheduled to start in May, are expected to boost real disposable income but are not expected to have a significant impact on motor gasoline consumption. 

Motor gasoline is supplied by four sources:  domestic production of ethanol and other oxygenates for gasoline blending, domestic refinery output, primary inventories, and net imports of motor fuel and blending components.

The methyl tertiary butyl ether (MTBE) phaseout in 2006, high oil prices, and new mandates requiring the use of renewable fuels, have all encouraged construction of new ethanol production capacity.  During 2007, 36 new ethanol plants or plant expansions started production, and in 2008 an additional 64 new facilities are expected to begin production.  Domestic ethanol production has increased from an average of 314,000 bbl/d during the summer of 2006, to 418,000 bbl/d during the summer of 2007, and is projected to average 550,000 bbl/d this summer.

This summer’s domestic gasoline production is expected to be down by about 20,000 bbl/d from last summer’s average.  Because of the expected 130,000 bbl/d increase in ethanol production, production of gasoline at U.S. refineries is expected to decline by as much as 150,000 bbl/d this summer.

At the onset of the peak driving season (April 1), total gasoline stocks, at 224 million barrels, are estimated to be ample.  That level is 23 million barrels above last year, 19 million barrels above the 5-year average, and the highest in 15 years.  Because of the high current inventory level, the average stock draw is projected to be about 88,000 bbl/d, compared with last summer’s 14,000 bbl/d stock draw (and the average of 15,000 bbl/d over the last 15 years).

Imports are a significant source of motor gasoline on the East Coast, accounting for 87 percent of the U.S. total.  The East Coast obtains almost 30 percent of its gasoline supply from imports compared with about 2 percent for the rest of the United States. Because of the expected growth in ethanol
production, the current high gasoline inventory levels, and the decline in gasoline consumption, there should also be less demand for gasoline imports this year.  For the current summer season, net imports of motor gasoline and blending components are projected to average 1.1 million bbl/d, down almost 100,000 bbl/d from last summer’s average of 1.2 million bbl/d.  

Diesel Fuel.   Distillate fuel consumption, which includes both diesel fuel and heating oil, is projected to be at about the same level as last summer.  Distillate fuel is supplied by three sources: domestic refinery output, primary inventories, and net imports.

Refinery production this summer is projected to be close to last summer’s average of 4.14 million bbl/d.   Refinery production of distillate fuel both here and in Europe may be constrained by the potentially weak gasoline market.  Without a growing outlet for gasoline, refiners may have to cut back on crude oil runs, resulting in lower distillate fuel output.  

Distillate inventories are projected to start the summer season at 109 million barrels. Although 11 million barrels less than last year, inventories are only slightly less than the 5-year average.  Consistent with seasonal patterns, distillate stocks are projected to rise to 132 million barrels at the end of third quarter, only 2 million barrels less than the year-earlier level.  As a result, distillate stocks are projected to build at a daily average rate of 122,000 bbl/d over the summer compared to 76,000 bbl/d last summer.

Because of the demand for building inventories during the summer to meet next winter’s heating fuel demand, net imports are projected to average 115,000 bbl/d, up from 55,000 bbl/d last summer.  However, strong growth in world demand for distillate fuels and constrained supplies could limit the availability of imports and leave inventories lower than desired at the beginning of next winter.

 

Natural Gas

Consumption.  Total natural gas consumption is expected to increase by 1.0 percent in 2008 and by 0.8 percent in 2009.  The assumption of normal weather is expected to lead to limited growth in residential and commercial demand in 2008, while economic conditions are expected to limit industrial sector growth for the year.  In 2009, consumption is projected to decrease slightly in the residential and commercial sectors, with a small increase expected in the industrial sector.   Finally, milder summer temperatures are expected to leave natural gas consumption for electricity generation unchanged in 2008, after an increase of more than 10 percent in 2007.  Consumption growth of 2.9 percent is expected in the electric power sector in 2009.

Production and Imports.  Total U.S. marketed natural gas production is expected to increase by 2.9 percent in 2008 and by 0.2 percent in 2009.  In 2008, the development of deepwater supplies is expected to drive production growth of 4.8 percent in the Gulf of Mexico.  Production from the Lower-48 onshore region is expected to continue the upward trend of recent years, increasing by 2.7 percent, led by growth in unconventional production basins.  In 2009, production growth will be offset partially by the absence of further increases in rigs drilling natural gas prospects; the natural decline in production from current wells, particularly in the offshore fields; and rising production costs.  In 2009, natural gas production in the Gulf of Mexico is projected to decline by 0.7 percent while production in the Lower-48 onshore region is expected to increase by 0.3 percent.

Imports of liquefied natural gas (LNG) are projected to reach about 680 billion cubic feet (Bcf) for 2008, representing a 12-percent decline from the record volume received in 2007.  Strong demand in Asia and Western Europe, which compete with the United States for LNG supplies, has greatly reduced the number of U.S.-bound LNG cargoes so far this year.  Although current import volumes are low, EIA expects U.S. LNG imports to rebound slightly this summer as global demand wanes.  An increase in global LNG supplies, particularly expansions in Nigeria and Norway, are expected to boost shipments of LNG to the United States in 2009, when import volumes are projected to total about 950 Bcf.

Inventories. On March 28, 2008, working natural gas in storage was 1,248 Bcf.  Current inventories are now 6 Bcf above the 5-year average (2003-2007) and 304 Bcf below the level during the corresponding week last year.

Prices.  The Henry Hub spot price averaged $9.74 Mcf in March, nearly $1.00 per Mcf more than the average spot price in February.  This was the first month since December 2005 that Henry Hub spot prices averaged more than $9 per Mcf.  The recent upward price shift reflects a number of factors, including the dropoff in LNG imports compared to year-ago levels, high oil prices, and the drawdown in storage to the lowest levels in 4 years.  As seasonal demand wanes, spot prices are expected to decline before they begin to rise again toward a winter peak.  On an annual basis, the Henry Hub spot price is expected to average about $8.59 per Mcf in 2008 and $8.32 per Mcf in 2009.

 

Electricity

Consumption.  Cooling degree-days in the summers of 2006 and 2007 were 12 percent and 10 percent higher than normal, respectively.  Given the assumption that summer temperatures this year will be close to normal, total annual electricity consumption is expected to grow at a relatively slow rate of 0.7 percent in 2008 and return to a more normal rate of 1.3 percent in 2009. 

Prices.  Spot prices for coal, especially in the Appalachian region, have rapidly increased in recent months.  However, due to the lagged effect of purchase contracts and rate regulation, these fuel cost increases are not expected to have a significant impact on retail electricity prices in the near-term. Residential electricity prices are projected to increase at a rate of 2.7 percent in 2008 and a slightly higher rate of 3.1 percent in 2009.

 

Coal

Consumption.  Projected increases in renewable generation, particularly hydropower and wind, combined with modest growth in electricity consumption, are expected to keep growth of coal consumption in the electric power sector to about 0.5 percent and 0.3 percent in 2008 and 2009, respectively. 

Production and Inventories.   U.S. coal production fell in 2007 (1.5 percent) for the first time since 2003.  Projected weak demand for coal is expected to result in small growth (0.6 percent) in coal production for 2008 and no growth for 2009.  Total coal stocks are estimated to have grown by 1.3 percent in 2007 despite a nearly 16-percent decline in primary stocks (held by producers and coal distributors).  This trend is expected to continue in 2008, as total coal stocks are forecast to rise by 3.6 percent and primary stocks are projected to decline by 11.2 percent.

Imports and Exports.  Growth of coal imports into the United States slowed in 2007 to only 0.3 percent.  Coal imports had experienced double-digit growth previously (19 percent in 2006 and 12 percent in 2005) but modest growth of 0.9 percent is expected in 2008.  Increases in coal demand, coupled with the need for lower-sulfur coals, will see imports grow by 6.2 percent in 2009.  U.S. coal exports are estimated to have increased by nearly 10 million short tons, or 19.2 percent, in 2007. In 2008, strong global demand for coal, coupled with supply issues in other major coal-exporting countries, is expected to result in a 15-percent increase in U.S. coal exports.  Slower global coal demand growth in 2009 is projected to lead to a 7.4-per
cent decline, about 5 million short tons, in exp.

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Tancred Lidderdale 
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   ph: (202)586-7321 

or

Neil Gamson  
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   ph: (202)586-2418