U.S. Energy Information Administration (EIA)
Short-Term Energy Outlook
May 10, 2011 Release
(Next update June 7, 2011) 
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Highlights
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West Texas Intermediate (WTI) crude oil spot prices averaged $89 per barrel inFebruary, $103 per barrel in March, and $110 per barrel in April. During the first week of May WTI crude oil prices fell by nearly $17 per barrel to $97 per barrel, along with a broad set of commodities, and then rebounded by almost $6 per barrel yesterday. However, EIA still expects oil markets to tighten through 2012 given projected world oil demand growth and slowing growth in supply from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC). Projected WTI spot prices average $103 per barrel in 2011 and $107 per barrel in 2012, reductions of about $4 and $6 per barrel respectively from last month’s Outlook.
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Despite the moderate downward revision to the outlook for oil prices, the rise in crude oil prices from last year continues to imply higher petroleum product prices this year compared with last. EIA forecasts that the annual average regular-grade retail gasoline price will increase from $2.78 per gallon in 2010 to $3.63 per gallon 2011 and to $3.66 per gallon in 2012. The forecast regular-grade motor gasoline retail price averages $3.81 per gallon during this summer’s driving season (from April 1 through September 30), up from $2.76 per gallon last summer, but 5 cents per gallon lower than last month’s Outlook. The forecast U.S. monthly average regular gasoline price during the summer peaks in June at $3.88 per gallon. Prices of futures and options contracts for wholesale gasoline over the 5 days ending May 5 suggest a 41-percent probability that the national monthly average retail price for regular gasoline could exceed $4.00 per gallon during July 2011.
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Natural gas working inventories ended April 2011 at 1.8 trillion cubic feet (Tcf), about 11 percent, or 230 billion cubic feet (Bcf), below the 2010 end-of-April level. EIA expects that working gas inventories will build strongly during the summer and approach record-high levels in the second half of 2011. The projected Henry Hub natural gas spot price averages $4.24 per million British thermal units (MMBtu) in 2011, $0.15 per MMBtu lower than the 2010 average. EIA expects the natural gas market to begin tightening in 2012, with the Henry Hub spot price increasing to an average of $4.65 per MMBtu.
Global Crude Oil and Liquid Fuels
Crude Oil and Liquid Fuels Overview. EIA projects that total world oil consumption will grow by 1.4 million barrels per day (bbl/d) in 2011, which is about 0.1 million bbl/d lower than last month’s Outlook, and 1.6 million bbl/d in 2012, slightly higher than forecast last month. Supply from non‐OPEC countries increases by an average of about 0.6 million bbl/d annually through 2012, which is about 0.2 million bbl/d higher than in last month’s Outlook. OECD inventory reports for the first quarter 2011 have come in higher than EIA projected in last month’s Outlook. Consequently, while EIA still expects the market will rely on both a drawdown of inventories and increases in the production of crude oil and non‐crude liquids in OPEC member countries to meet projected demand growth, the forecast for OPEC crude oil and liquid fuels production has been lowered from last month’s Outlook by about 0.14 million bbl/d in 2011 and 0.5 million bbl/d in 2012.
Among the major uncertainties that could push oil prices above or below our current forecast are: continued unrest in producing countries and its potential impact on supply; decisions by key OPEC-member countries regarding their production in response to the global increase in oil demand; the rate of economic growth, both domestically and globally; fiscal issues facing national and sub‐national governments; and China’s efforts to address concerns regarding its growth and inflation rates.
Global Crude Oil and Liquid Fuels Consumption. World crude oil and liquid fuels consumption grew to 86.7 million bbl/d in 2010, surpassing the previous record of 86.3 million bbl/d set in 2007. EIA expects that world liquid fuels consumption will grow by 1.4 million bbl/d in 2011, followed by 1.6 million bbl/d growth in 2012, resulting in total world consumption of 89.7 million bbl/d in 2012 (World Liquid Fuels Consumption Chart). Countries outside the Organization for Economic Cooperation and Development (OECD) will make up almost all of the growth in consumption over the next two years, with the largest increases coming from China, Brazil, and the Middle East. EIA expects that, among the OECD nations, only the United States and Canada will show growth in oil consumption over the next two years, offsetting declines in OECD Europe and Japan.
Non-OPEC Supply. EIA projects that non‐OPEC crude oil and liquid fuels production will increase by 690,000 bbl/d in 2011 and by 420,000 bbl/d in 2012 (Non-OPEC Crude Oil and Liquid Fuels Production Growth Chart). The greatest increases in non‐OPEC oil production during 2011 occur in Brazil, Canada, China, and countries that were formerly part of the Soviet Union. EIA expects annual average production growth of 160,000 bbl/d in Brazil, 170,000 bbl/d in Canada, 140,000 bbl/d in China, and 250,000 bbl/d in the former Soviet Union countries in 2011. In 2012, EIA expects Canadian production to grow by 210,000 bbl/d, while production in China and Brazil grow by 140,000 and 110,000 bbl/d, respectively. Production growth in the former Soviet Union countries slows to 30,000 bbl/d in 2012. Other non-OPEC areas are expected to decline, including a decrease in European and North Sea production of 130,000 bbl/d in 2011 and a further decrease of 200,000 bbl/d in 2012.
OPEC Supply. Forecast OPEC crude oil production declines in 2011, falling by about 450,000 bbl/d, followed by an increase of 640,000 bbl/d in 2012. EIA assumes that about one-half of Libya’s pre-disruption production will resume by the end of 2012. EIA projects that OPEC surplus capacity will fall from 3.9 million bbl/d at the end of 2010 to 3.6 million bbl/d at the end of 2011, followed by a further decline to 3.1 million bbl/d by the end of 2012 (OPEC Surplus Crude Oil Production Capacity Chart). Forecast OPEC non‐crude liquids production increases by 0.8 million bbl/d in 2011 and by 0.4 million bbl/d in 2012.
OECD Petroleum Inventories. EIA expects that OECD onshore inventories will decline in 2011 following the steep drop in floating storage that has already occurred. Projected onshore OECD stocks fall by about 20 million barrels in 2011, followed by an additional 54 million barrel decline in 2012. Days of supply (total inventories divided by average daily consumption) drops from a relatively high 58.1 days during the fourth quarter of 2010 to 57.0 days in the fourth quarter 2011, and 55.7 days of supply in the fourth quarter 2012 (Days of Supply of OECD Commercial Stocks Chart).
Crude Oil Prices. EIA expects that WTI spot prices, which averaged $79 per barrel in 2010, will average $103 per barrel in 2011 and $107 per barrel in 2012, reductions averaging about $4 and $6 per barrel respectively from last month’s Outlook (West Texas Intermediate Crude Oil Price Chart). During the first week of May WTI crude oil prices fell by nearly $17 per barrel to $97 per barrel, along with a broad set of commodities, and then rebounded by almost $6 per barrel yesterday. EIA still expects oil markets to tighten as growing liquid fuels demand in the emerging economies and slowing growth in non-OPEC supply maintain upward pressure on oil prices.
Growing volumes of Canadian crude oil imported into the United States contributed to record-high storage levels at Cushing, Oklahoma, and a price discount for WTI compared with similar quality world crudes such as Brent. Consequently, the projected U.S. refiner average acquisition cost of crude oil, which was about $2.70 per barrel below WTI in 2010, is $1.80 per barrel above WTI in 2011 and $1.10 per barrel above WTI in 2012.
Energy price forecasts tend to be highly uncertain (Energy Price Volatility and Forecast Uncertainty). WTI futures for July 2011 delivery over the 5-day period ending May 5 averaged $110 per barrel and implied volatility averaged 29 percent, establishing the lower and upper limits of a 95-percent confidence interval for the market’s expectations of monthly average WTI prices in July of $91 per barrel and $133 per barrel, respectively. Last year at this time, WTI for July 2010 delivery averaged $83 per barrel and implied volatility averaged 33 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $67 per barrel and $103 per barrel. Based on WTI futures and options prices, the probability that the monthly average price of WTI crude oil will exceed $120 per barrel in December 2011 is about 31 percent. Conversely, the probability that the monthly average December 2011 WTI price will fall below $90 per barrel is about 21 percent.
U.S. Crude Oil and Liquid Fuels
U.S. Liquid Fuels Consumption. Total consumption of liquid fuels increased by 380,000 bbl/d (2.0 percent) to 19.1 million bbl/d in 2010 (U.S. Liquid Fuels Consumption Growth Chart). The major sources of this consumption growth were distillate fuel oil (diesel fuel and heating oil), which grew by 160,000 bbl/d (4.5 percent), and motor gasoline, which increased by 40,000 bbl/d (0.4 percent). Projected total U.S. liquid fuels consumption increases by 140,000 bbl/d (0.7 percent) in 2011, and by a further 170,000 bbl/d (0.9 percent), to 19.5 million bbl/d, in 2012, which is still well below the record-high 20.8 million bbl/d in 2005.
In 2011, forecast distillate fuel consumption growth of almost 80,000 bbl/d (2.1 percent) accounts for over half of the forecast increase in liquid fuels consumption, while forecast growth in gasoline and jet fuel grow by just 16,000 bbl/d (0.2 percent) and 13,000 bbl/d (0.9 percent), respectively. In 2012 motor gasoline consumption rises by 75,000 bbl/d (0.8 percent), the highest growth rate since 2006, driven by growing population, rising employment, and rising income. Jet fuel consumption increases 23,000 bbl/d (1.6 percent) in 2012. In contrast, distillate fuel consumption growth moderates slightly to 66,000 bbl/d (1.7 percent) in 2012 as industrial output grows more slowly than in 2011.
U.S. Liquid Fuels Supply and Imports. Domestic crude oil production, which increased by 150,000 bbl/d in 2010 to 5.51 million bbl/d, declines by 20,000 bbl/d in 2011 and by a further 60,000 bbl/d in 2012 (U.S. Crude Oil Production Chart). EIA expects production from the Federal Gulf of Mexico (GOM) to fall by 130,000 bbl/d in 2011 and by a further 190,000 bbl/d in 2012 because of production declines from existing fields and the impact of last year’s drilling moratorium and the subsequent delay in issuing new drilling permits. Projected Alaskan crude oil production falls by 80,000 bbl/d in 2011 and then shows no change in 2012. These production declines are offset by projected increases in lower-48 non-GOM production of 200,000 bbl/d in 2011 and 140,000 bbl/d in 2012 because of the increase in oil-directed onshore drilling activity. According to Baker Hughes Inc., the number of active non-GOM oil rigs has increased from 485 at the end of April 2010 to 918 at the end of April 2011.
Liquid fuel net imports (including both crude oil and refined products) fell from 57 percent of total U.S. consumption in 2008 to 49 percent in 2010, primarily because of the decline in consumption during the recession and rising domestic production. EIA forecasts that liquid fuel net imports will average 9.4 million bbl/d in 2011 and 9.8 million bbl/d in 2012, representing 49 percent and 50 percent of total consumption, respectively.
U.S. Petroleum Product Prices. EIA forecasts that the annual average regular-grade retail gasoline price will increase from $2.78 per gallon in 2010 to $3.63 per gallon 2011 and to $3.66 per gallon in 2012, reductions of 7 cents and 14 cents per gallon respectively from last month’s Outlook. The sizable jump in retail prices this year reflects not only the higher average cost of crude oil but also an increase in U.S. refinery gasoline margins (the difference between refinery wholesale gasoline prices and the average cost of crude oil) from an average of $0.34 per gallon in 2010 to $0.50 per gallon in 2011, near the $0.53 per gallon and $0.56 per gallon highs set in 2006 and 2007, respectively. The projected refinery gasoline margin falls back to $0.44 per gallon in 2012.
Motor gasoline prices vary widely by region. In the Gulf Coast (PADD 3), forecast retail prices average 14 cents per gallon below the national average, while prices on the West Coast (PADD 5) average more than 25 cents per gallon above the national average. The major reasons for that variation are differences in state taxes, the distance from alternative sources of supply, and differences in gasoline quality required by state and federal clean air regulations.
EIA expects that on-highway diesel fuel retail prices, which averaged $2.99 per gallon in 2010, will average $3.89 per gallon in 2011 and $3.93 per gallon in 2012, reductions of 9 cents and 14 cents per gallon respectively from last month’s Outlook. Projected U.S. refinery diesel fuel margins increase by 22 cents per gallon, from an average $0.38 per gallon in 2010 to $0.60 per gallon in 2011, then fall back to $0.54 per gallon in 2012.
U.S. Natural Gas Consumption. EIA expects total natural gas consumption to grow by 0.5 percent to 66.5 billion cubic feet per day (Bcf/d) in 2011 (U.S. Total Natural Gas Consumption Chart). Forecast industrial consumption rises 1.9 percent to 18.4 Bcf/d in 2011, and electric power consumption rises 0.4 percent to 20.3 Bcf/d.
Projected total consumption increases by 0.7 percent in 2012 to 67.0 Bcf/d. Growth continues in the industrial and electric power sectors at 1.4 percent and 2.6 percent, respectively. Residential and commercial consumption each decline by 1.6 percent in 2012 stemming from forecast 2.2 percent reduction in natural gas-weighted heating degree-days.
U.S. Natural Gas Production and Imports. Marketed natural gas production has been growing steadily since 2005, primarily because of the boom in horizontal drilling in unconventional shale formations. EIA expects total marketed production to average 1.4 Bcf/d (2.3 percent) higher in 2011 compared with last year. Marketed natural gas production fell by 1.1 Bcf/d in February 2011 from the month before, but this drop can largely be attributed to temporary factors including seasonal maintenance in the GOM and colder-than-normal weather in Texas, New Mexico, Oklahoma, and Wyoming which caused freeze-offs (gas flow blockages resulting from water vapor freezing in the gas stream), forcing temporary shut downs to lower-48 onshore production (see Today in Energy, February 23, 2011). EIA expects production will recover from February levels but begin modest month-to-month declines that could continue through the year because of reductions in the number of active natural gas drilling rigs.
The number of rigs drilling for natural gas, as reported by Baker Hughes Inc., has fallen from 973 in April 2010 to 882 as of April 29, 2011. More rigs are being directed toward oil instead of gas largely because of the large price disparity between the two fuels on an energy-equivalent basis. On April 21, 2011, the number of active oil-directed rigs exceeded the number of gas-directed rigs for the first time since April 28, 1995.
The decline in drilling activity this year and forecast increase in consumption next year contribute to higher natural gas prices next year and a turnabout in drilling activity during 2012. EIA expects total marketed production to increase by 0.6 Bcf/d (0.9 percent) to 63.8 Bcf/d in 2012.
Growing domestic natural gas production continues to reduce reliance on natural gas imports. Because of the earthquake in Japan and subsequent nuclear generation outages, Japan’s demand for liquefied natural gas (LNG) as a replacement fuel for electric power generation is expected to increase, contributing to higher global LNG prices. Japan is already the largest importer of LNG in the world, with daily imports averaging more than 9 Bcf/d in 2010. EIA projects U.S. imports of LNG will average 0.9 Bcf/d in 2011, down 21 percent from 1.2 Bcf/d in 2010.
U.S. Natural Gas Inventories. On April 29, 2011, working natural gas in storage stood at 1,757 Bcf, which is 226 Bcf below last year’s level in late April (U.S. Working Natural Gas in Storage Chart). Cold temperatures and production freeze-offs in January and February contributed to relatively large draws on inventories early in the year. EIA expects that inventories, though lower than last year, will remain robust given higher forecast production throughout the 2011 injection season. Projected inventories near 3.9 Tcf at the end of October 2011 because of high production levels and a mild summer relative to last year.
U.S. Natural Gas Prices. The Henry Hub spot price averaged $4.25 per MMBtu in April, 28 cents higher than the March average and 25 cents higher than forecast in last month’s Outlook (Henry Hub Natural Gas Price Chart). EIA expects that the Henry Hub price will average $4.24 per MMBtu in 2011, a decline of 15 cents from the 2010 average. EIA expects that the forecast decline in production from current levels will contribute to a tightening domestic market next year with the Henry Hub price averaging $4.65 per MMBtu in 2012.
Uncertainty over future natural gas prices is lower this year compared with last year at this time. Natural gas futures for July 2011 delivery (for the 5-day period ending May 5) averaged $4.65 per MMBtu, and the average implied volatility was 34 percent. The lower and upper bounds for the 95-percent confidence interval for July 2011 contracts are $3.61 per MMBtu and $5.98 per MMBtu. At this time last year, the natural gas July 2010 futures contract averaged $4.11 per MMBtu and implied volatility averaged 46 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $2.95 per MMBtu and $5.70 per MMBtu.
U.S. Electricity Consumption. EIA expects little change in total U.S. electricity consumption from 2010 to 2011 (U.S. Total Electricity Consumption Chart). Forecast cooler temperatures this summer compared with last year’s hot summer drive the projected 2.5-percent decline in retail electricity sales to the residential sector. This decline in residential consumption is offset by projected increases in electricity sales to the industrial and commercial sectors of 3.2 percent and 0.7 percent, respectively. During 2012, forecast total U.S. electricity consumption grows by 2.4 percent.
U.S. Electricity Generation. EIA projects that total generation by the electric power sector will fall by 0.2 percent during 2011 (U.S. Electric Power Sector Generation Growth Chart). This slight decline in generation is offset by increased imports of electricity from Canada and Mexico. Heavy spring precipitation and higher-than-normal snowpack in the Pacific Northwest should drive U.S. hydroelectric generation to its highest level since 2006. In contrast, forecast coal-fired and nuclear generation decline by 2.2 percent and 1.6 percent, respectively, this year. EIA expects a 2.4-percent increase in total electric power sector generation in 2012, fueled primarily by increased coal and natural gas generation.
U.S. Electricity Retail Prices. EIA expects U.S. residential electricity prices to rise by 2.3 percent in 2011 to an average of 11.84 cents per kilowatthour (U.S. Residential Electricity Prices Chart). The forecast of flat coal and natural gas prices to the electric power sector this year should contribute to very little change in retail electricity prices during 2012.
U.S. Coal Consumption. Coal consumption in the electric power sector grew by 4.5 percent in 2010, primarily the result of higher electricity demand during the summer. EIA projects that coal consumption in the electric power sector will decrease by 0.7 percent in 2011, as electricity demand remains flat and generation from other energy sources increases. Forecast coal consumption in the electric power sector grows by 3.0 percent in 2012, falling just short of reaching 1 billion short tons. The electric power sector consumed an average of 1 billion short tons annually from 2003 through 2008 (U.S. Coal Consumption Growth Chart).
U.S. Coal Supply. Coal production in 2010 grew by only 1.0 percent despite the 5-percent increase in total U.S. coal consumption. A drawdown in stocks, particularly in the electric power sector, met the demand increase (U.S. Electric Power Sector Coal Stocks Chart). EIA projects that coal production will increase by 0.6 percent in 2011, followed by a 2.3-percent increase in 2012 (U.S. Annual Coal Production Chart).
U.S. Coal Trade. Strong global demand for coal, particularly metallurgical coal used to produce steel, resulted in sharp increases in U.S. coal exports in 2010. Metallurgical coal’s share of total U.S. coal exports grew from 52 percent in 2008 to 69 percent in 2010. Supply disruptions in several key coal exporting countries have affected the amount of coal available on the world market. Consequently, EIA expects U.S. coal exports to increase in 2011, particularly in the first half of the year, reaching 93 million short tons (mmst). Forecast U.S. coal exports fall back to more typical historical levels (about 80 mmst) in 2012 as supply from other major coal-exporting countries recovers.
The strong global demand for coal outside the United States also contributed to a 14.5 percent decline in U.S. coal imports in 2010 (to 19.4 mmst) despite an increase in consumption. EIA expects the trend of lower U.S. coal imports to continue, with imports below 19 mmst in both 2011 and 2012. U.S. coal imports averaged about 31 mmst annually from 2004 through 2009.
U.S. Coal Prices. Electric power sector delivered coal prices have been rising relatively steadily over the last 10 years, reflecting longer-term coal contracts initiated during a period of high energy prices, rising transportation costs, and increased consumption. However, EIA expects that the power sector coal price will remain stable in 2011 and 2012 as coal competes with natural gas for generation market share. The projected power-sector delivered coal price, which averaged $2.26 per MMBtu in 2010, averages $2.30 per MMBtu and $2.28 per MMBtu in 2011 and 2012, respectively.
EIA estimates that fossil-fuel CO2 emissions increased by 3.8 percent in 2010 (U.S. Carbon Dioxide Emissions Growth Chart). Forecast fossil-fuel CO2 emissions increase by 0.1 percent in 2011. Projected emission increases from higher petroleum and natural gas consumption are offset by declines in coal consumption. Expected increases in consumption of all fossil fuels in 2012 contribute to a 1.8-percent increase in fossil-fuel CO2 emissions.
