Short-Term Energy Outlook
	May 12, 2009 Release (Next Update: June 9, 2009)	Printer-friendly versions: Full Report     Text Only     Tables Only     Charts Only
Highlights    |    Global Crude Oil and Liquid Fuels    |    U.S. Crude Oil and Liquid Fuels    |    Natural Gas    |    Electricity    |    Coal

Highlights

• Energy prices rose in early May following reports suggesting that the U.S. economy may have reached a turning point in the current recession, at least in some sectors.  Near-term prices in this Outlook, however, remain somewhat below market prices as of its release date given that prospects for a global economic turnaround remain highly uncertain.  EIA’s forecast is based on a macroeconomic outlook that assumes the U.S. and global economies begin to stabilize in the coming months and show signs of recovery late in 2009 and into 2010.

• The price of West Texas Intermediate (WTI) crude oil is expected to remain relatively flat for the remainder of 2009, averaging about $55 per barrel over the second half of 2009.  Assuming a modest economic improvement next year, WTI prices are expected to average about $58 in 2010.

• During this summer driving season (April through September), regular gasoline retail prices are projected to average $2.21 per gallon, down about $1.60 from last summer.  The annual average regular-grade gasoline retail price in 2009 is expected to be $2.12 per gallon, increasing to an average of $2.30 in 2010.   The annual average diesel fuel retail prices are expected to be $2.26 and $2.48 per gallon, respectively, in 2009 and 2010.

• The Henry Hub natural gas spot price is projected to average $4.06 per thousand cubic feet (Mcf) in 2009, down from an average of $9.13 per Mcf in 2008.  Then, buoyed by modest economic growth next year, the price is expected to increase to an average of about $5.21 per Mcf in 2010.  The projected steep decline in industrial output this year is expected to reduce industrial natural gas consumption by 8 percent, resulting in a 1.9-percent decrease in total annual consumption of natural gas.  Natural gas consumption in the electric power sector, however, is projected to increase by 2.1 percent since lower natural gas prices are expected to back out some coal consumption in this sector.  (See this month’s supplemental report, The Implications of Lower Natural Gas Prices in the Electric Power Sector). 

Global Crude Oil and Liquid Fuels

Overview.  EIA is currently projecting a weaker global oil market for 2009 than anticipated in last month's assessment.  Expectations of global economic recovery and a resultant increase in demand were offset by initial data for the first quarter showing high oil inventories, weak consumption, and higher-than-expected production.  Price increases will likely be muted by the substantial surplus production capacity held by members of the Organization of the Petroleum Exporting Countries (OPEC), along with very high level of inventories among members of the Organization for Economic Cooperation and Development (OECD).  The expectation that prices should rise in 2009-2010 because of future economic growth will need to be tempered with the current market reality of this supply overhang.  The main downside risk to this Outlook’s oil price forecast remains a prolonged global economic slump, as well as the possibility of reduced compliance with OPEC production targets in the months ahead.

Consumption. World oil consumption remains weak because of the global economic downturn.  Based on revised data and a re-estimation of the impact of the economic slowdown on oil consumption, EIA has reduced its forecast for world oil consumption from the fourth quarter of 2008 through the end of the forecast period. World oil consumption is now projected to fall by 1.8 million barrels per day (bbl/d) in 2009, a decline that is 0.4 million bbl/d larger than the decline projected in last month’s Outlook.  The forecasts for Asia and the Former Soviet Union (FSU) show the largest revisions.  In total, OECD oil consumption is expected to fall by nearly 2 million bbl/d in 2009, with oil consumption in Japan alone expected to fall by over 0.5 million bbl/d in 2009.  Partially offsetting declining OECD oil consumption is a growth of 0.2 million bbl/d in non-OECD consumption, particularly in the Middle East, China, and India.  World oil consumption is expected to grow by 0.7 million bbl/d in 2010, on the back of a rebound in global economic activity next year (World Liquid Fuels Consumption).

Non-OPEC Supply. EIA has revised projected non-OPEC supply growth in 2009 upward to 100,000 bbl/d.  Recent data indicate that production in the first quarter of 2009 was higher than expected in the North Sea, FSU, and Latin America, although much of the revision for Latin America reflects a re-evaluation of seasonal ethanol production in Brazil.  Total liquids production from Norway and offshore United Kingdom was 140,000 bbl/d higher in the first quarter than forecasted from last month.  Russia tallied a year-over-year increase in its oil production in March, the first such increase in the past 6 months and only the second such increase since November 2007.  Non-OPEC supply is expected to increase by a modest 45,000 bbl/d in 2010, due to increasing production from Brazil, the United States, and the FSU (Non-OPEC Crude Oil and Liquid Fuels Production Growth).

OPEC Supply.  The current weakness in global oil markets is driven not only by demand weakness, but also by additional supplies from both non-OPEC and OPEC members.  Crude oil production by OPEC (including Iraq) in the first quarter averaged 28.7 million bbl/d, roughly 3 million bbl/d below third-quarter 2008 levels.  In addition, production of other petroleum liquids outside of the quota system, such as natural gas liquids, is projected to continue growing.  OPEC will meet again on May 28 to assess market conditions and production targets.  EIA expects that total OPEC petroleum liquids production will average 33.5 million bbl/d for the year, some 2 million bbl/d below 2008 levels, and could reach 34.4 million bbl/d in 2010.  Surplus crude oil production capacity in OPEC, which has increased from an estimated 1 million barrels in mid-2008 to 4.3 million barrels in April 2009, is projected to remain relatively high over the forecast period, exceeding 5 million bbl/d in 2010.

Inventories.  Revised data indicate that OECD commercial inventories at year-end 2008 stood at 2.7 billion barrels.  At 57 days of forward cover, OECD commercial inventories were well above average levels for that time of year (Days of Supply of OECD Commercial Stocks).  Preliminary estimates suggest that OECD commercial inventories increased by 34 million barrels during the first quarter, reaching 60 days of forward cover.  The United States was mostly responsible for this counter-seasonal build in OECD commercial inventories, with other OECD-member commercial stocks largely unchanged during that period.  EIA estimates there are also an additional 130 million barrels of crude oil in floating storage, which we take into consideration in our oil market outlook.

U.S. Crude Oil and Liquid Fuels

Consumption.  Total consumption of liquid fuels and other petroleum products averaged 19.4 million bbl/d in 2008, down nearly 1.3 million bbl/d from 2007 (U.S. Petroleum Products Consumption Growth). Based on the prospects of a continuing weak economy, consumption is projected to shrink by an additional 570,000 bbl/d in 2009, led by a 200,000-bbl/d fall in distillate fuel consumption.  The assumed gradual economic recovery in 2010 is expected to contribute to a 250,000-bbl/d increase in total liquid fuels consumption.  Having fallen by 320,000 bbl/d last year, motor gasoline consumption is projected to increase slightly in 2009 and then  rise by a further 70,000 bbl/d in 2010, or 0.7 percent, as continuing high unemployment constrains increases in driving activity.  Distillate consumption in 2010 is projected to rise by only 50,000 bbl/d, reflecting a weak recovery in industrial activity.      

Production.  Total domestic crude oil production averaged 4.96 million bbl/d in 2008, down from 5.06 million bbl/d in 2007 (U.S. Crude Oil Production).  Crude oil production is projected to increase to an average of 5.20 million bbl/d in 2009 and 5.33 million bbl/d in 2010.  Contributing to the increases in output are the Gulf of Mexico Thunder Horse and Tahiti platforms.
   
Prices.  WTI crude oil prices, which averaged $99.57 per barrel in 2008 (Crude Oil Prices), are projected to average $52 per barrel in 2009 and $58 per barrel in 2010.  These prices are about $1 per barrel and $5 per barrel, respectively, below those projected in last month’s Outlook.   However, a stronger-than-expected economic recovery or lower non-OPEC production (due to low oil prices, financial market constraints, or more aggressive action to cut production by OPEC countries) could lead to a faster and stronger rise in oil prices.  As always, energy price forecasts are highly uncertain.  Both recent experience and the sizable participation in near-term crude oil futures options contracts at strike prices that are significantly different from current futures market prices clearly demonstrate that crude oil prices can move within a wide range in a relatively short period.

EIA projects that regular-grade motor gasoline retail prices, which averaged $3.26 per gallon in 2008, will average $2.12 per gallon this year, down 4 cents per gallon from last month’s Outlook projection.  Regular-grade gasoline retail prices are projected to rise to $2.30 per gallon in 2010, 12 cents lower than projected in the previous Outlook.  These projections indicate that total gasoline margins, which had declined last year as a result of weakness in gasoline consumption and growth in ethanol supplies, are expected to stabilize, albeit at low levels, as consumption slowly recovers and increases in ethanol supplies moderate. 

Diesel fuel retail prices, which averaged $3.80 per gallon in 2008, are projected to average $2.26 per gallon in 2009, down 4 cents per gallon from the previous Outlook.  Diesel fuel retail prices are projected to average $2.48 per gallon in 2010, down 21 cents per gallon from the previous Outlook.

Natural Gas

Consumption.  Total natural gas consumption is projected to decline by 1.9 percent in 2009 and then increase slightly in 2010 (Total U.S. Natural Gas Consumption Growth).   Weak economic conditions leading to significantly lower natural gas consumption in the industrial sector are expected to be the main source of the dip in total consumption this year.  The projected increase in natural gas use in the electric power sector offsets some of this decline.  Lower relative natural gas prices compared with coal, particularly in the Southeast, are expected to induce higher utilization of natural-gas-fired electric generation capacity in the near-term and lead to a consumption increase of 2.1 percent in the electric power sector this year.  (See this month’s supplemental report, The Implications of Lower Natural Gas Prices in the Electric Power Sector).  Natural gas consumption is expected to decline slightly in the residential and commercial sectors this year.  Similar to other fuels across the energy market, the outlook for natural gas consumption in 2010 is highly contingent upon the timing and pace of economic recovery.  Under current assumptions, consumption growth in the electric power sector and a slight recovery in the industrial sector are expected to contribute to a small increase in total consumption for the year, despite minor consumption declines in the residential and commercial sectors due to the expectation of 0.8 percent fewer heating degree-days than the previous year.

Production and Imports.  Total U.S. marketed natural gas production is expected to decline by 1.0 percent in 2009 and by 2.8 percent in 2010.  As a result of poor economic conditions and lower natural gas prices, total working natural gas rigs have declined by 54 percent since last August.  The erosion of drilling activity combined with production curtailments in response to current and projected low prices and high inventory levels are expected to cause natural gas production in the lower-48 non-Gulf of Mexico (GOM) to decrease by about 1.6 percent in 2009.  Conversely, marketed production from the Federal GOM is expected to increase by 3.4 percent in 2009 due to the return of facilities damaged by Hurricanes Gustav and Ike as well as the start-up of new production associated with offshore oil projects.  Despite expectations of higher prices next year, the lagged effects of the downturn in drilling this year and the natural decline in productivity from existing wells are expected to contribute to lower production in both the lower-48 non-GOM and Federal GOM regions in 2010. 

Expected weak natural gas demand in the liquefied natural gas (LNG)-consuming countries of Asia and Europe, the startup of new liquefaction capacity, and limited natural gas storage capacity in countries that typically rely on LNG are expected to increase the availability of LNG for the United States.  U.S. LNG imports are expected to increase from 350 billion cubic feet (Bcf) in 2008 to about 500 Bcf in 2009 and 650 Bcf in 2010.  However, there is significant uncertainty associated with the global LNG balance.  U.S. pipeline imports are expected to decline by about 7 percent in 2009 because of the impacts of suspended drilling programs and declining well productivity in Canada. 

Inventories.  On May 1, 2009, working natural gas in storage was 1,918 Bcf (U.S. Working Natural Gas in Storage).  Current inventories are now 362 Bcf above the 5-year average (2004–2008), and 491 Bcf above the level during the corresponding week last year.  The natural gas working inventory is projected to peak at about 3,635 Bcf at the end of October 2009, exceeding the previous record of 3,565 Bcf reported for the end of October 2007.  Over the past 10 years natural gas working inventory has typically reached a maximum level during the first 2 weeks of November, with the earliest seasonal peak reported the week ending October 20, 2006, and the latest peak the week ending November 30, 2001.

Prices.  The Henry Hub spot price averaged $3.62 per Mcf in April, $0.46 per Mcf below the average spot price in March, as consumption has flagged amidst the drop in economic activity.  No significant rise in average spot prices is expected until cooler temperatures increase the demand for space heating in the fall.  While the seasonal boost in natural gas consumption is expected to add some strength to prices, robust storage levels are expected to limit any significant upward price movement through the winter.  However, as the expected improvement in the economy contributes to demand recovery in 2010, sustained lower production levels could lead to higher prices in the latter part of the forecast period.  The Henry Hub spot price is expected to average $4.06 per Mcf in 2009 and $5.21 per Mcf in 2010.

Electricity

Consumption.  The drag on industrial retail sales of electricity as a result of the ongoing recession is expected to decrease total electricity consumption by 0.8 percent this year.  Consumption is projected to return to a more normal growth rate of 1.5 percent in 2010 (U.S. Total Electricity Consumption). 

Prices.  The increased cost of constructing new generation and transmission facilities has led to rising residential retail electricity prices despite lower power generation fuel costs.  As a result, residential electricity prices are projected to increase by 4.4 percent in 2009.  The lower fuel costs are expected to be passed through to consumers later in the year, slowing growth in 2010 residential retail prices to 1.9 percent (U.S. Residential Electricity Prices).

Generation.  EIA’s preliminary estimates indicate that power generation by natural-gas-fired plants increased by nearly 3 percent in February 2009 from the same month last year while coal generation fell by about 14 percent.  This change in the relative generation fuel mix may be a response to the converging generation costs for coal and natural gas (see The Implications of Lower Natural Gas Prices in the Electric Power Sector).  A similar pattern is expected to continue during the rest of 2009, with natural gas generation increasing by 2.9 percent and coal generation falling by 2.8 percent.

Coal

Consumption.   A decline in overall electricity generation, combined with projected increases from natural gas, nuclear, and renewable generation (hydroelectric and wind) sources, are projected to lead to a 2.3-percent decline in coal consumption in the electric power sector.  An expected increase in total electricity generation of 1.6 percent in 2010 is expected to lead to a 1.4-percent increase in electric-power-sector coal consumption.  Consumption in the coke-plant sector is expected to continue falling over the forecast period (U.S. Coal Consumption Growth). 

Production.  Production is expected to fall by 4.9 percent in 2009 in response to lower total domestic coal consumption combined with export declines.  Production is projected to increase by 1.0 percent in 2010 as domestic consumption and exports increase with an improving economy (U.S. Annual Coal Production).   

Exports.  Reductions in global coal demand are expected to reduce U.S. coal exports by about 12 million short tons, a 14-percent decrease, in 2009 but an expected increase in global coal demand is projected to result in a 15-percent increase in exports in 2010.

Prices.  The average delivered coal price to the electric power sector increased by more than 17 percent in 2008, to an average of $2.07 per million Btu.  Although record increases in spot prices (some well over 100 percent) for several types of coal contributed to the increase in the cost of coal, spot market purchases make up only a small portion of total coal consumed.  Instead, a rise in transportation charges was the primary reason for the cost increase last year.  Despite declines in electricity demand and lower fuel costs, the annual average delivered coal price, which is primarily dictated by long-term coal contracts, is projected to increase to $2.11 per million Btu in 2009 since current delivered prices were set when contracts were entered into during a period of high prices for all fuels a year or more ago.  The average delivered coal price is expected to decline to $1.91 per million Btu in 2010.