Short-Term Energy Outlook

August 12, 2008

WASHINGTON, DC – August 12, 2008

* The spot price of West Texas Intermediate (WTI) crude oil increased from $122 per barrel on June 4 to $145 per barrel on July 3, in part because of perceptions of tenuous supply in several of the major exporting countries.  By August 5, the price fell back to less than $120 per barrel.  WTI prices, which averaged $72 per barrel in 2007, are projected to average $119 per barrel in 2008 and $124 per barrel in 2009.

* The recent fall in crude oil prices has pulled down the retail prices for both gasoline and diesel fuel.  The weekly price of regular-grade gasoline, which peaked at $4.11 per gallon on July 14, averaged $3.81 per gallon on August 11, a decrease of 30 cents.  Diesel fuel fell from $4.76 per gallon on July 14 to $4.35 on August 11, a drop of 41 cents.   Annual average gasoline prices are projected to be $3.65 and $3.82 per gallon, respectively, for 2008 and 2009, compared with $2.81 in 2007.  Diesel prices are projected to average $4.18 and $4.27 per gallon, respectively, in 2008 and 2009, compared with $2.88 in 2007.

* The Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is expected to average $10 per Mcf in 2008 and $9 per Mcf in 2009. 

* Residential heating oil prices during the upcoming heating season (October though March) are projected to average $4.34 per gallon compared with $3.31 during the last heating season, an increase of about 31 percent. Residential natural gas prices over the same period are projected to average $15.58 per Mcf compared with $12.72 per Mcf, during the last heating season, an increase of about 22 percent.


Global Petroleum

Overview.  Prospects for improved oil market fundamentals over the next 18 months point to an easing in the market balance and price weakness over the near term.  The combination of slower U.S. and global oil consumption growth, increased production capacity for crude oil and natural gas liquids in the Organization of the Petroleum Exporting Countries (OPEC) beginning in the third quarter 2008 and continuing through 2009, and higher non-OPEC supply, raises the prospect for a drop in demand for OPEC crude oil and an increase in surplus capacity.  Downward price pressures would increase if the economic slowdown proves deeper or longer than expected, and if higher prices lead to lower consumption and lower demand for OPEC crude than currently anticipated.   There is also a risk that any weakness in oil prices could be minimal or short-lived, especially if consumption growth exceeds current expectations or if oil production capacity expansion plans in either OPEC or non-OPEC nations turn out to be lower than expected.  Supply risks in Iraq, Nigeria, and Iran, as well as threats of hurricanes over the near term, continue to influence market expectations.  In addition, OPEC production behavior that would lead to voluntary production cuts aimed at keeping inventories fairly tight would also limit downward price pressure. 

Consumption.  Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels.  The decline in U.S. consumption in the first half of 2008, reflecting slower economic growth and the impact of high prices, was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 bbl/d.  Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels. The projection for 2009 consumption is about 460,000 bbl/d lower than last month’s assessment, reflecting lower expectations for consumption in the United States and other OECD countries.  Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India (World Oil Consumption).  Further consumption declines in the OECD nations, coupled with the move to reduce subsidies in large parts of the developing world, should limit future world consumption growth.

Non-OPEC Supply. EIA is revising this month’s outlook for non-OPEC supply growth in 2008 compared with last month’s, largely because of project delays in Asia, lower output growth now expected in the Former Soviet Union, lower growth in Canada caused by the upward revision of 2007 data, and reduced production in Azerbaijan due to the closure of the BTC pipeline.  If new projects come online as now anticipated, total non-OPEC supply is projected to rise by about 510,000 bbl/d in the second half of 2008 and by 850,000 bbl/d in 2009 compared with year-earlier levels.  This compares with a 330,000 bbl/d decline in non-OPEC supply recorded during the first half of 2008.  Non-OPEC supply growth through 2009 is expected to be led by Brazil, the United States, and Azerbaijan (Non-OPEC Oil Production Growth). Given recent history, possible additional delays in key projects as well as accelerating production declines in some older fields cannot be ruled out.  For example, Russian oil output was down by almost 1 percent in the first half of the year, raising the chances for the first annual decline in output since 1998.  As a result, net non-OPEC production gains could be less than the current forecast, leading to both higher demand for OPEC oil and higher prices than currently projected.

OPEC Supply.  OPEC crude oil production is expected to rise to 32.9 million bbl/d during the third quarter of 2008, up from 32.3 million bbl/d in the second quarter.  The forecast assumes that Saudi Arabia will maintain its July 9.7 million bbl/d production level through the third quarter, representing a 400,000 bbl/d rise from second quarter levels.  OPEC crude oil production is projected to drop to about 32.4 million bbl/d in the fourth quarter of 2008, and to decline to 31.6 million bbl/d in 2009.  Lower crude production combined with planned increases in OPEC total liquids production capacity suggests OPEC surplus crude production capacity could increase from 1.2 million bbl/d currently to about 3.6 million bbl/d by the end of next year (OPEC Surplus Oil Production Capacity).  Although an increase in the supply cushion could ease upward price pressure, it does not appear large enough to trigger a sharp price decline.  Moreover, possible delays in adding supply capacity, proactive OPEC decisions to cut output, or expectations that supply growth in the post-2009 period will have a difficult time keeping pace with demand, could minimize and shorten any market weakness.

Inventories.  OECD commercial inventories during the second quarter of 2008 increased by only 490,000 bbl/d, well below the average build of 910,000 bbl/d during this time of the year.  At the end of the second quarter, estimated commercial inventories stood at 2.58 billion barrels, 17 million barrels below the 5-year average and equal to about 53 days of forward consumption (Days of Supply of OECD Commercial Stocks).  OECD commercial inventories are projected to rise by 340,000 bbl/d in the third quarter compared with the average seasonal build of 450,000 bbl/d, which would leave OECD commercial  inventories about 30 million barrels below the 5-year average at the end of the third quarter.


U.S. Petroleum

Consumption.  Total U.S. petroleum and other liquids consumption is projected to shrink by almost 500,000 bbl/d in 2008 based on prospects for a weak economy and continuing high crude oil and product price
s extending into 2009 (U.S. Petroleum Products Consumption Growth).  Preliminary June and July 2008 weekly survey data indicate that year-over-year declines in total consumption, which began in August 2007, have narrowed since earlier this year.  During the first 5 months of 2008, total petroleum consumption fell by an average of almost 900,000 bbl/d from the same period in 2007.  During June and July, the year-over-year declines narrowed to just over 400,000 bbl/d.  The year-over-year declines in consumption are not expected to be as large over the forecast period, with 2009 average total consumption about 120,000 bbl/d lower than the 2008 average.

Supply.  In 2008, total domestic crude oil output is projected to average 5.15 million bbl/d, up slightly from the 2007 average of 5.10 million bbl/d (U.S. Crude Oil Production).  Production growth in the Lower-48 region is expected to more than offset declines in Alaskan output.  In 2009, total production is projected to increase to 5.36 million bbl/d, due mostly to the Thunder Horse and Tahiti platforms coming on-stream in late 2008 and 2009, respectively.  This projection includes an expectation of hurricane-induced outages of about 10 million barrels for the offshore region in 2008 (see Hurricane Outlook).  Fuel ethanol production is projected to increase from an annual average of 430,000 bbl/d in 2007 to 590,000 bbl/d in 2008 and to 650,000 bbl/d in 2009.  Because of declining petroleum consumption and growing ethanol production, crude oil net imports are expected to fall by 240,000 bbl/d and petroleum product net imports by 400,000 bbl/d in 2008.  Total net imports of crude oil and petroleum products, which peaked at 60.3 percent of total petroleum consumption in 2005, are expected to fall to 56.4 percent and 54.5 percent, respectively, of total consumption in 2008 and 2009.

Prices.   WTI crude oil prices, which averaged $72 per barrel in 2007 (Crude Oil Prices), are projected to average $119 per barrel in 2008 and $124 per barrel in 2009. Regular-grade motor gasoline retail prices, which averaged $2.81 per gallon in 2007, are projected to rise to an average of $3.65 per gallon this year and $3.82 per gallon in 2009.  The weekly price of regular-grade gasoline, which peaked at $4.11 per gallon on July 14, averaged $3.81 per gallon on August 11, a decrease of 30 cents.  Gasoline prices are expected to continue falling slowly, averaging just less than $3.80 per gallon over the next few months.  This forecast reflects continuing weak gasoline margins because of the decline in gasoline consumption and growth in ethanol supply.  Diesel fuel retail prices in 2008 are projected to average $4.18 per gallon, up from $2.88 per gallon in 2007, and increase to an average of $4.27 per gallon in 2009.  These higher prices reflect strength in diesel demand, particularly in emerging markets, which has significantly increased the margins between diesel prices and crude oil costs from those of last year.  


Natural Gas

Consumption.  Total natural gas consumption is expected to increase by 3 percent in 2008 and by 1.7 percent in 2009 (Total U.S. Natural Gas Consumption Growth).   Consumption increases are expected in every sector in 2008.  The strongest growth during the forecast period is expected to come from the electric power sector (3.4 percent in 2008 and 3.1 percent in 2009) as natural gas-fired generation continues to take on a larger share of electric power supply.  Growth in natural gas consumption in the industrial sector has continued, although higher natural gas prices and the weakening economy add uncertainty to the current outlook.  In annual terms, consumption in the industrial sector is expected to increase by 1.6 percent in 2008 and by 0.8 percent in 2009.

Production and Imports.  Total U.S. marketed natural gas production is expected to increase by 8.0 percent in 2008 and by 3.7 percent in 2009.  Robust growth from unconventional production basins in the Lower-48 onshore region is expected to continue, while production is projected remain unchanged in the Federal Gulf of Mexico in 2008.  Marketed natural gas production from the Federal Gulf of Mexico is projected to increase by 3.5 percent in 2009 while sustained drilling activity is expected to lead to production growth next year of 3.9 percent in the Lower-48 onshore region.

Imports of liquefied natural gas (LNG) remain low as demand for natural gas in Asia-Pacific and Europe continues to attract cargoes with higher relative prices.  On the supply side, repairs, maintenance and delays in new liquefaction projects have limited the availability of LNG so far this year.  While a significant increase in global liquefaction capacity is projected in 2009, continuing natural gas demand growth and higher relative prices in Europe and Asia are expected to attract much of the new supply.  As reported on the Intercontinental Exchange (ICE), the recent price of natural gas for January delivery in the United Kingdom is about double the current January price for natural gas on the New York Mercantile Exchange (NYMEX).  LNG imports are expected to total 390 billion cubic feet (Bcf) in 2008, and 480 Bcf in 2009, compared with 771 Bcf in 2007.

Inventories. On August 1, 2008, working natural gas in storage was 2,517 Bcf (U.S. Working Natural Gas in Storage).  Current inventories are now 6 Bcf below the 5-year average (2003–2007) and 353 Bcf below the level during the corresponding week last year. 

Prices.  The Henry Hub spot price averaged $11.45 per Mcf in July, $1.62 per Mcf below the average spot price in June.  The spot price decline marks the end of consecutive increases in the monthly average price that began in October 2007.  While warmer-than-normal weather in July increased natural gas demand in the electric power sector, the decline in crude oil prices and continuing supply growth contributed to the decline in natural gas prices over the past month.  Looking ahead, strong domestic production is expected to limit the impact of lower LNG and Canadian imports on natural gas prices.  While extreme weather anomalies present a notable risk to the current outlook, spot prices are expected to remain below $10 per Mcf until December, when space heating demand rises.  On an annual basis, the Henry Hub spot price is expected to average about $10 per Mcf in 2008 and $9 per Mcf in 2009.



Consumption.  So far this summer (April-July) cooling degree-days have been about 8 percent higher than last year (U.S. Summer Cooling Degree-Days).  Temperatures have been particularly warm along the east and west coasts.  Despite the increased need for cooling so far this summer, milder temperatures forecast for August and September compared with last year and low economic growth should limit growth in electricity consumption during 2008 and 2009 to an annual average of about 1.2 percent (U.S. Total Electricity Consumption).

Prices.  Many utilities are continuing to pursue retail electricity rate increases in response to power generation fuel costs that have risen dramatically over the last 2 years.  For example, the delivered cost of natural gas to the electric power sector in March was $9.29 per million Btu, 25 percent higher than the average cost in March 2007.  Average U.S. residential electricity prices are expected to increase by 5 percent in 2008 and by 10 percent in 2009 (U.S. Residential Electricity Prices).



Consumption.  Electric-power-sector coal consumption grew by 1.9 percent in 2007.  Although first quarter 2008 electric-power-sector coal consumption grew by about 2 percent compared with first quarter 2007, slow growth in total electricity consumption is expected to limit growth in the sector to just 0.3 percent in 2008.  In 2009, continued slow growth in total electricity c
onsumption combined with projected increases from other generation sources (nuclear, natural gas, hydroelectric, and wind) will continue to dampen electric-power-sector coal consumption growth, projected to be flat at the 2008 level (U.S. Coal Consumption Growth). 

Production and Inventories.  U.S. coal production (U.S. Annual Coal Production) fell by 1.4 percent in 2007.  Growth in both exports and domestic consumption is expected to contribute to a 2-percent increase in coal production in 2008.  Secondary (consumer-held) coal stocks are estimated to have grown by 5.5 percent in 2007 to 159 million short tons.  Consumer stocks are expected to remain stable in 2008 and grow by an average of 2.7 percent in 2009.  Primary stocks, held by coal producers/distributors, are projected to decline by more than 6 million short tons between the end of 2007 and the end of 2009.

Exports.  In first quarter 2008, U.S. coal exports increased by 4.7 million short tons (42 percent) over first quarter 2007 shipments.  Strong global demand for coal, combined with supply disruptions in several key coal exporting countries (Australia, South Africa, and China) were the primary factors for the increase in coal exports.  Although the supply disruptions have ended, continued robust worldwide demand for coal is projected to lead to an overall 45-percent increase in U.S. coal exports in 2008.  Coal exports are projected to be 76.9 million short tons in 2009.  This is a 10 percent decline from 2008, but it is still significantly higher than the 59.2 million short tons exported in 2007.