Prices

Crude Oil Prices

The monthly average spot price of Brent crude oil increased by $9/b in December to $53/b. Market reactions to the November 30 OPEC agreement to cut production by 1.2 million b/d starting in January 2017 were a major contributor to rising oil prices in December.

Brent crude oil spot prices are expected to remain fairly flat in the coming months. Despite the recent OPEC agreement, EIA expects global oil inventory builds to continue but at a generally slower rate in 2017 and 2018 than the 2016 average build of 0.9 million b/d. Inventory builds are forecast to average 0.4 million b/d in the first half of 2017 before falling to an average of 0.2 million b/d in the second half of 2017, with a draw expected during the third quarter. The expected persistence of excess global oil supply in the near term, along with the responsiveness of U.S. tight oil production to rising oil prices in late 2016, is expected to limit significant upward oil price pressures in 2017. Brent crude oil prices are forecast to average $53/b in the first half of 2017 and $54/b in the second half of 2017.

Some upward price pressures are expected to emerge in 2018. Global oil markets are expected to be more balanced by mid-2018, with global oil inventories transitioning from moderate builds of 0.4 million b/d in the first half of the year to an average draw of 0.1 million b/d in the second half, resulting in a build of about 0.1 million b/d build for all of 2018. EIA forecasts Brent prices to average $55/b during the first half of 2018 and $57/b in the second half of 2018.

Average West Texas Intermediate (WTI) crude oil prices are forecast to be $1/b lower than Brent prices in 2017 and 2018. The slight price discount of WTI to Brent in the forecast is based on the assumption of competition between the two crude oils in the U.S. Gulf Coast refinery market.

Global economic developments and geopolitical events in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast. Uncertainty remains as to the effectiveness and duration of the concurrent OPEC and non-OPEC production cuts, which could influence prices in either direction. Also, the potential for continued efficiency gains and cost reductions from non-OPEC producers in the new higher price environment could result in additional volumes of supply that could put downward pressure on prices.

The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the oil price outlook. WTI futures contracts for April 2017 delivery that were traded during the five-day period ending January 5 averaged $55/b, and implied volatility averaged 29%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in April 2017 at $43/b and $71/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $35/b and $93/b for prices in December 2017. In January 2016, WTI for April 2016 delivery averaged $38/b, and implied volatility averaged 46%, with the corresponding lower and upper limits of the 95% confidence interval at $25/b and $56/b.

Product Prices

EIA expects the retail price of regular gasoline to average $2.31/gal during the first quarter of 2017, 15 cents/gal higher than projected in last month's STEO, primarily as a result of higher crude oil prices and stronger forecast refinery margins. EIA expects that the U.S. monthly average retail price of regular gasoline will increase from $2.31/gal in January 2017 to a high of $2.50/gal in June before falling to $2.21/gal in December. The U.S. regular gasoline retail price, which averaged $2.15/gal in 2016, is forecast to average $2.38/gal in 2017 and $2.41/gal in 2018.

There is significant variation in the regional forecast for retail gasoline prices. Annual average forecast prices for 2017 range from a low of $2.14/gal in the Gulf Coast—Petroleum Administration for Defense District (PADD) 3—to a high of $2.75/gal in the West Coast (PADD 5).

Refinery wholesale gasoline margins (the difference between the wholesale price of gasoline and the price of Brent crude oil) averaged 35 cents/gal in December. This level was lower than the 45 cents/gal average in December 2015, but it was 24 cents/gal higher than the five-year average for December. Higher U.S. gasoline production and inventory levels in 2016 contributed to refinery wholesale gasoline margins averaging 42 cents/gal for the year, which was down 6 cents/gal from 2015 levels. Despite the rising gasoline production and high inventory levels, margins remain above the five-year average as gasoline consumption is estimated to be up 1.1% in 2016 compared with 2015, and total gasoline exports were up 24% through October 2016 compared with the same period in 2015. Refinery wholesale gasoline margins are expected to average 37 cents/gal in 2017 and 33 cents/gal in 2018.

The diesel fuel retail price averaged $2.31/gal in 2016, which was the lowest annual average since 2004. The diesel price is forecast to average $2.73/gal in 2017 and $2.84/gal in 2018, driven higher primarily by higher crude oil prices and growing diesel consumption, which is expected to contribute to higher diesel refinery margins.

Natural Gas Prices

The Henry Hub natural gas spot price averaged $2.51/MMBtu in 2016, and it is expected to increase to an average of $3.55/MMBtu in 2017 and then average $3.73/MMBtu in 2018. Prices generally increased throughout 2016 because of high natural gas use for electricity generation during the hot summer and because of declining production. Henry Hub spot prices in December 2016 averaged $3.59/MMBtu, when inventories fell below the five-year average. This was the first time the price averaged more than $3/MMBtu for a month since December 2014.

Higher residential and commercial space heating demand during the first quarter of 2017 compared with a year earlier (which was very warm) is expected to keep prices above $3.50/MMBtu into April. With natural gas production also expected to be lower than year-ago levels in the first quarter of 2017, EIA expects inventory levels to be below the previous five-year average through much of the winter, putting upward pressure on natural gas prices. In 2018, upward price pressures are expected to continue, as both domestic consumption and exports growth are forecast to accelerate.

Natural gas futures contracts for April 2017 delivery that were traded during the five-day period ending January 5 averaged $3.38/MMBtu. Current options and futures prices indicate that market participants place the lower and upper bounds for the 95% confidence interval for April 2017 contracts at $2.39/MMBtu and $4.77/MMBtu, respectively. Last year at this time, the natural gas futures contracts for April 2016 delivery averaged $2.38/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $1.61/MMBtu and $3.52/MMBtu, respectively.

Coal Prices

EIA estimates the delivered coal price averaged $2.13/MMBtu in 2016, a 4% decline from the 2015 price. Coal prices are forecast to increase in 2017 and in 2018 to $2.18/MMBtu and $2.21/MMBtu, respectively.

Electricity Retail Prices

The U.S. residential electricity price averaged 12.5 cents per kilowatthour (kWh) in October 2016. This price is 2.1% lower than the U.S. residential price in October 2015. EIA expects the annual average U.S. residential electricity price to increase by 2.6% in 2017 and by 2.5% in 2018.