TODAY’S STUDY: U.S. ENERGY NOW

Short-Term Energy Outlook
September 7, 2011 (U.S. Energy Information Administration/U.S. Department of Energy)

Highlights

EIA's economic growth assumptions have been lowered substantially compared with last month's Outlook. This forecast assumes that U.S. real gross domestic product (GDP) grows by 1.5 percent this year and 1.9 percent next year compared with 2.4 percent and 2.6 percent, respectively, in the previous Outlook. World oil-consumption-weighted real GDP grows by 3.1 percent and 3.8 percent in 2011 and 2012, respectively, compared with 3.4 percent and 4.1 percent in the last Outlook. With weaker economic growth and lower petroleum consumption growth, EIA expects the U.S. average refiner acquisition cost of crude oil to rise from an average of $100 per barrel in 2011 to $103 per barrel in 2012, compared with an increase to $107 per barrel in 2012 in last month's Outlook.

Regular-grade gasoline retail prices fell by 40 cents per gallon from their peak this year of $3.97 per gallon on May 9 to $3.57 per gallon on June 27 following a decline in crude oil prices. Gasoline retail prices stabilized in July and August with weekly retail prices averaging between $3.58 per gallon and $3.71 per gallon, but are projected to fall to an average $3.47 per gallon in the fourth quarter 2011 after refiners switch production from summer-grade gasoline to lower-cost winter-grade gasoline.

click to enlarge

Natural gas working inventories ended August 2011 at 3.0 trillion cubic feet (Tcf), about 5 percent, or 144 billion cubic feet (Bcf), below the 2010 end-of-August level. EIA expects that working natural gas inventories will approach last year's high levels by the end of this year's injection season. The projected Henry Hub natural gas spot price averages $4.20 per million British thermal units (MMBtu) in 2011, $0.18 per MMBtu lower than the 2010 average. EIA expects the natural gas market to tighten moderately in 2012, with the Henry Hub spot price increasing to an average of $4.30 per MMBtu.

Global coal supply disruptions, particularly in Australia, and growing demand in China have helped boost U.S. coal exports for the first half of 2011 to a 29-year high of 54 million short tons (MMst), an increase of 35 percent compared to the same period in 2010 and double 2009 levels. EIA expects coal exports to begin to weaken, totaling 45 MMst over the second half of 2011 and 87 MMst in 2012.

click to enlarge

Global Crude Oil and Liquid Fuels

Crude Oil and Liquid Fuels Overview. The projected pace of global oil demand growth is lower in this month's Outlook due to less optimistic assumptions about global economic growth. The downward revision to oil demand growth relieves some of the potential oil market tightness that had been implied by previous forecast balances. Nonetheless, without a significant change in the outlook for supply, EIA expects markets to draw upon inventories to meet at least some of the growth in consumption over the fourth quarter of 2011 and beyond. In 2012, oil demand growth from countries outside of the Organization for Economic Cooperation and Development (OECD) is projected to outpace the growth in supply from producers that are not members of the Organization of the Petroleum Exporting Countries (OPEC), implying a need for OPEC producers to increase their output to balance the market.

The inherent uncertainty of the revised price forecast is evidenced by the various shocks to oil supply, demand, and prices that have occurred this year. Upside risks to the crude oil price outlook remain, particularly due to ongoing unrest in oil-producing regions and the possibility that non-OECD demand will be more resilient than expected. Yet downside risks arguably predominate, as fears persist about the rate of global economic recovery, contagion effects of the debt crisis in the European Union, and other fiscal issues facing national and sub-national governments. On the supply side, the possibility remains that Libya may be able to ramp up oil production and exports sooner than anticipated…

click to enlarge

Crude Oil Prices. West Texas Intermediate (WTI) crude oil spot prices fell from an average of $97 per barrel inJuly to $86 per barrel in August (West Texas Intermediate Crude Oil Price Chart). EIA has revised the projected oil price paths downward from last month's Outlook. EIA expects that the U.S. refiner average crude oil acquisition cost will average $100 per barrel in 2011 and $103 per barrel in 2012 compared with $100 per barrel and $107 per barrel for 2011 and 2012, respectively, in the previous Outlook.
The current price discount for WTI relative to other U.S. and world crude oils is expected to continue until transportation bottlenecks restricting the movement of crude oil out of the mid-continent region are relieved. Consequently, the projected average U.S. refiner acquisition cost of crude oil, which averaged almost $2.70 per barrel below WTI in 2010, averages about $6 per barrel above WTI in 2011 and $8 per barrel above WTI in 2012.

Energy price forecasts are highly uncertain (Market Prices and Uncertainty Report). WTI futures for November 2011 delivery over the 5-day period ending September 1 averaged $88 per barrel and implied volatility averaged 40 percent, establishing the lower and upper limits of a 95-percent confidence interval for the market's expectations of monthly average WTI prices in November of $67 per barrel and $116 per barrel, respectively. Implied volatility, or the expectation of future price volatility, is up from the 33 percent implied volatility reported in last month's Outlook for the October 2011 contract. Last year at this time, WTI for November 2010 delivery averaged $75 per barrel and implied volatility averaged 32 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $61 per barrel and $94 per barrel.

click to enlarge

U.S. Crude Oil and Liquid Fuels

U.S. Liquid Fuels Consumption. Total consumption of liquid fuels in 2010 grew 410 thousand bbl/d, or 2.2 percent, the highest rate of growth since 2004 (U.S. Liquid Fuels Consumption Growth Chart). In contrast, projected total U.S. liquid fuels consumption in 2011 falls by 170 thousand bbl/d (0.9 percent). Motor gasoline consumption accounts for almost all the projected decline for the year.

EIA expects total liquid fuels consumption to increase by 80 thousand bbl/d (0.4 percent) to 19.1 million bbl/d in 2012, down from the 170 thousand bbl/d increase projected in the previous Outlook because of the downward revisions to the U.S. economic growth forecast. Projected motor gasoline consumption rises by 40 thousand bbl/d (0.5 percent) as highway travel increases modestly, and distillate fuel consumption increases by 30 thousand bbl/d (0.9 percent) as growth in industrial activity and non-petroleum imports continues to slow as a result of continuing weak economic growth in 2012…

click to enlarge

Natural Gas

U.S. Natural Gas Consumption. Projected natural gas consumption for electric power generation fell from 29.7 Bcf/d in July to 29.2 Bcf/d in August, as the extreme temperatures (411 cooling degree-days in July) receded somewhat (to 350 cooling degree-days in August). Hurricane Irene, later downgraded to Tropical Storm Irene as it moved up the East Coast, brought wind, rain, and power outages near the end of the month.

EIA expects that total natural gas consumption will grow by 1.8 percent to 67.3 billion cubic feet per day (Bcf/d) in 2011 (U.S. Total Natural Gas Consumption Chart). Growth in the industrial and electric power sectors accounts for most of the growth in total consumption, with expected increases in 2011 to 18.5 Bcf/d (2.1 percent) and 20.7 Bcf/d (2.4 percent), respectively. Projected total natural gas consumption increases 0.6 percent in 2012 to 67.7 Bcf/d.

U.S. Natural Gas Production and Imports. Marketed natural gas production is expected to average 65.8 Bcf/d in 2011, a 4.0 Bcf/d (6.4 percent) increase over 2010. The majority of this growth is centered in the onshore production in the Lower 48 States, which will more than offset steep projected declines in the Federal Gulf of Mexico (GOM). Forecast GOM production falls 0.9 Bcf/d (13.9 percent) in 2011. EIA expects that overall production will continue to grow in 2012, but at a slower pace, increasing 1.1 Bcf/d (1.7 percent) to an average of 66.9 Bcf/d.

Drilling activity has been resilient despite lower natural gas spot and futures prices. According to Baker Hughes, the August 26 rig count had rebounded to 898 active drilling rigs targeting natural gas, up from 866 on May 20. If drilling continues to increase, production could grow more than expected in 2012.

click to enlarge

Growing domestic natural gas production has reduced reliance on natural gas imports and contributed to increased exports. EIA expects that pipeline gross imports of natural gas will fall by 4.1 percent to 8.7 Bcf/d during 2011 and by another 3.8 percent to 8.4 Bcf/d in 2012. Projected U.S. imports of liquefied natural gas (LNG) fall from 1.2 Bcf/d in 2010 to 1.0 Bcf/d in both 2011 and 2012. Pipeline gross exports to Mexico and Canada are expected to average 4.1 Bcf/d in 2011 and 4.2 Bcf/d in 2012, compared with 3.1 Bcf/d in 2010…

U.S. Natural Gas Prices. The Henry Hub spot price averaged $4.05 per MMBtu in August 2011, 37 cents lower than the July 2011 average (Henry Hub Natural Gas Price Chart). This month's Outlook lowers the 2011 forecast by 4 cents to $4.20 per MMBtu and lowers the 2012 forecast by 11 cents to $4.30 per MMBtu. The increase in price from 2011 to 2012 reflects some tightening in supply as production growth slows in 2012.

Uncertainty about natural gas prices is lower this year compared with last year at this time (Market Prices and Uncertainty Report). Natural gas futures for November 2011 delivery (for the 5-day period ending September 1, 2011) averaged $4.07 per MMBtu, and the average implied volatility was 34 percent. The lower and upper bounds for the 95-percent confidence interval for November 2011 contracts are $3.16 per MMBtu and $5.26 per MMBtu. At this time last year, the November 2010 natural gas futures contract averaged $4.07 per MMBtu and implied volatility averaged 48 percent. The corresponding lower and upper limits of the 95-percent confidence interval were $2.84 per MMBtu and $5.83 per MMBtu.

click to enlarge

Electricity

U.S. Electricity Consumption. Although cumulative cooling degree-days for 2011 through August for the entire United States were just 2.8 percent higher than the same period in 2010, some regions experienced extreme weather during the past few months. Record heat in Texas has led to record-setting power demand while Hurricane Irene recently caused widespread power outages in the Northeast. Overall, EIA expects relatively flat growth this year for U.S. retail sales of electricity to the residential sector.

Electricity sales to the industrial sector were 3.0 percent higher during the first half of 2011 compared with the same period last year. However, a projected slower recovery in manufacturing for the remainder of this year should translate to lower year-over-year growth in industrial electricity sales of 0.6 percent during the second half. EIA expects total consumption of electricity during 2011 to grow by 0.6 percent from last year's level and by 0.2 percent in 2012 (U.S. Total Electricity Consumption Chart).

U.S. Electricity Generation. A large number of unplanned nuclear plant outages during the spring of 2011 led to the lowest second-quarter level of nuclear generation since 1999. EIA expects that total nuclear generation for 2011 will be 3.4 percent lower than last year's level. In contrast, the share of generation fueled by natural gas continues to increase, spurred by relatively low fuel costs compared with coal and continued warm summer temperatures. EIA expects the fuel share for natural gas to rise from 23.8 percent in 2010 to 24.2 percent this year and 24.9 percent in 2012 (U.S. Electricity Generation by Fuel, all Sectors Chart).

U.S. Electricity Retail Prices. Retail prices of electricity to the residential sector during the first six months of this year were generally higher than the same period in 2010. Growth in residential electricity prices should moderate during the second half. EIA expects average U.S. residential electricity prices to increase by 2.3 percent in 2011 and by 0.6 percent in 2012 (U.S. Residential Electricity Prices Chart).

click to enlarge

Coal

U.S. Coal Consumption. EIA expects that coal consumption for electricity generation will decline by 21 million short tons (MMst) (2.1 percent) in 2011, as total electricity generation rises by 0.4 percent and generation from natural gas increases by almost 2 percent. Forecast coal consumption in the electric power sector declines an additional 22 MMst (2.3 percent) in 2012.

U.S. Coal Supply. EIA forecasts that coal production will fall by 2.2 percent in 2011 despite a significant increase in coal exports. Coal production in the Western region declined in the first half of 2011 by 2.0 percent compared to the same period the year before, while production in the Appalachian and Interior regions increased by 1.6 percent and 5.6 percent, respectively. EIA expects coal production will remain flat in 2012 (U.S. Annual Coal Production Chart).

EIA expects total coal inventories to fall by 12 percent (27 MMst) in 2011, and decline by an additional 2.5 percent (4.9 MMst) in 2012 (U.S. Electric Power Sector Coal Stocks Chart).

U.S. Coal Trade. U.S. coal exports rose by about 35 percent during the first half of 2011 compared with 2010. The first half exports of 54 MMst were the highest since 1982, when exports were 57 MMst. EIA expects U.S. coal exports to remain elevated over the second half of 2011, reaching an annual total of 99 MMst. Forecast U.S. coal exports fall back to about 87 MMst in 2012 as supply from other major coal-exporting countries recovers from disruptions. EIA also expects strong global demand for coal to continue to suppress coal imports.

U.S. Coal Prices. Average delivered coal prices to the electric power sector have risen steadily over the last 10 years, with an average annual increase of 6.7 percent. EIA expects that this trend will continue in 2011, with a significant portion of the increase attributed to a sharp rise in transportation costs. The projected average delivered coal price to the electric power sector, which averaged $2.26 per MMBtu in 2010, averages $2.37 per MMBtu for 2011 and $2.36 per MMBtu for 2012.

click to enlarge

Carbon Dioxide Emissions

EIA estimates that CO2 emissions from combusting fossil fuels increased by 3.9 percent in 2010 (U.S. Carbon Dioxide Emissions Growth Chart). Forecast fossil-fuel CO2 emissions fall by 0.7 percent in 2011, as emission increases from higher natural gas consumption are offset by declines in coal and petroleum consumption. Increases in hydroelectric generation and other renewable energy sources in 2011 also help to mitigate emissions growth. Fossil-fuel CO2 emissions in 2012 remain stable as expected declines in coal emissions are nearly equaled by the increases in emissions from petroleum and natural gas.