In its new Short-Term Energy Outlook, released today, the Energy Information Administration (EIA) projects that crude oil prices will settle down from current high levels to average between $21 and $21.50 per barrel in 1997 and 1998. An average decline of about $1 per barrel is seen between the fourth quarter of 1996 and the first quarter of 1997, particularly since Iraqi crude oil is now flowing into the world market. A decline is less likely if winter turns abnormally cold in the weeks ahead.

Despite the expected short-term decline in prices, these projections represent an upward revision in average price forecasts from EIA's previous reports. Strong world oil demand and relatively low inventories have kept persistent pressure on spot prices in recent months.

Residential heating oil prices for the fourth quarter of 1996 averaged $1.05 per gallon, 16 cents per gallon above the fourth quarter of 1995. Much of this increase reflects the increase in crude oil prices (14 cents per gallon) over the same period. Assuming normal weather over the next few months, residential heating oil prices in the first quarter of 1997 are expected to be about $1.06 per gallon, 10 cents per gallon higher than the same period in 1996, with about 80 percent of that increase being related to crude oil price increases. Severe weather could result in more increases. For example, retail prices would be expected to be up to 6 cents per gallon higher than in the Outlook's base case if weather is 10 percent colder than normal.

U.S. stocks of distillate fuels (primarily heating oil and diesel fuel) have been well below year-ago levels so far this heating season, although recent, relatively mild, weather in the Northeast has tended to alleviate the situation somewhat. European stocks have also been low, contributing to generally tight Atlantic Basin supplies. Maintaining or improving the relative stock situation during the rest of the winter in the United States will probably require higher imports and/or more distillate production than seen last year. On the domestic production side, U.S. refiners have proven that they are capable of producing distillate at high rates, based on an estimated year-over-year increase for the fourth quarter of 1996 of nearly 10 percent.

Other highlights from the EIA quarterly Short-Term Energy Outlook include:

• On December 9, 1996, the United Nations allowed Iraq to export oil for the first time in over 6 years. According to the EIA, the additional 600,000 barrels per day of Iraqi oil exports is expected to cause world oil prices to fall $1-$2 per barrels below what they would have been without the green light from the U.N. EIA also projects that world oil inventories will be at least partially rebuilt in 1997 from currently low levels. Over the course of 1997, the additional Iraqi oil exports are equivalent to adding another three days' worth of supply to the world market.

• In 1997, total U.S. net oil imports of 8.9 million barrels per day are projected to exceed 1977's record high of 8.6 million barrels per day. This would be equal to 49 percent of total petroleum demand. The record high is expected despite recent slower declines in U.S. oil production and higher average oil prices.

• The decline in natural gas production capacity which began in 1986 has been clearly reversed in 1996, mainly due to new discoveries in the Gulf of Mexico Outer Continental Shelf. Dry gas production is expected to increase through the forecast period, due to wellhead prices averaging $2 per thousand cubic feet from 1996 to 1998, as well as expected growth in natural gas demand and continuing improvements in production technology.

• Despite the rapid natural gas stock build this summer and the positive prospects for gas production capability, the early winter weather, especially in the Midwest, slowed down the storage build and sent gas spot prices soaring to nearly $4.00 per thousand cubic feet at the Henry Hub in mid-November. (Mid-December brought record closing prices for near-month gas futures on the NYMEX.) Although the composite wellhead price is not as volatile as the spot price, there could be a substantial average wellhead price rise this winter of about 60 cents per thousand cubic feet compared with last winter. Improved gas productive capacity in 1997 may alleviate peak-period pressure on wellhead prices by next winter, even if storage levels are not increased beyond 1996 levels.

• In 1996, total electricity demand growth is estimated at 2.8 percent. In 1997, demand is expected to grow more slowly due mainly to expectations of normal weather, but pick up in 1998 due to continued economic growth.

• In 1997, electricity sector demand for coal is expected to grow more slowly than the 3.9 percent seen in 1996 as a result of slower growth in electricity demand. Declines in hydroelectric generation will lead to higher growth in coal demand by the electricity sector in 1998.

The Short-Term Energy Outlook provides quarterly short-term energy supply, demand, and price projections for publication in January, April, July and October.

To meet the public's demand for more timely availability of energy data and forecasts, the Short Term-Energy Outlook is now being released on Internet more than a week earlier than its actual publication. The Outlook is available on Internet as of January 3; the published version is expected to be available about 10 days later.

Internet access to the Short-Term Energy Outlook can be obtained through the EIA Home Page on the World Wide Web system. The Internet address is:

http://www.eia.doe.gov/emeu/steo/pub/level1.html

Copies of the Short-Term Energy Outlook, First Quarter 1997 are available from the U.S. Government Printing Office, 202/512-1800, or through EIA's National Energy Information Center (NEIC), 202/586-8800.

EIA Program Contact: David Costello, 202/586-1468

EIA Press Contact: Thomas Welch, 202/586-1178

DOE News Media Contact: Joanna Stancil, 202/586-5806

EIA-97-02

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