Short-Term Energy Outlook for March-DOE : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Short-Term Energy Outlook

March 2001


U.S. economic growth assumptions have been lowered for this edition of the Outlook from last month’s report, resulting in somewhat weaker expected growth in U.S. energy consumption. We now expect U.S. real GDP to advance at about 2.2 percent in 2001 instead of the 2.6 percent projected in February. A result of the downward revision in projected growth this year is a slightly more rapid rebound in 2002 but overall levels of economic activity are lower throughout the projection period. Oil demand in the United States and other consuming regions is now seen as likely to increase less rapidly in 2001 than projected previously. We have adjusted global oil demand growth for this year downward to 1.5 million barrels per day from the 1.6 million barrels per day indicated last month. This results in projected world demand levels of 77.2 million barrels per day in 2001 and 78.9 million barrels per day in 2002. Cumulatively, we have lowered the world demand total expected for 2001 by 700,000 barrels per day from the level projected three months ago.

Despite the lower demand outlook, industrialized country oil stocks continue to fall below expectations, effectively offsetting most if not all of any resulting downward pressure on prices relative to the levels indicated in our previous Outlook. Thus, we see the U.S. refiner cost of crude oil likely to average around $26.60 per barrel this year compared to $27.70 per barrel in 2000. Our view of the world oil balance suggests that significant improvement in the inventory situation (on a seasonally adjusted basis) over the next 21 months is rather unlikely, so prices are likely to remain relatively high through 2002 (Figure 1). A more severe slowdown in economic growth in consuming countries than we are allowing for in our base case could alter the price outlook significantly. We have evaluated in some detail the sort of overall demand impacts in the United States that could be expected under a very low short-term growth scenario. In such a case, U.S. oil demand growth could be reduced by as much as 150,000 - 200,000 barrels per day relative to the base case. Reverberations worldwide from such a development would be expected to generate additional reductions in demand elsewhere in 2001 or 2002.

The U.S. natural gas supply picture seemed to brighten a little last month as average storage withdrawals during the month were below normal and below previous expectations. However, even if only modest withdrawals are required this month, we are still likely to end the heating season with the total level of gas in storage below the previous low recorded by EIA. In our view, only a spectacular performance from the U.S. and Canadian gas industry in terms of increased production or an extremely mild summer this year would generate much in the way of additional reductions in natural gas prices beyond what has already happened since mid winter. As we currently expect working gas to reach 689 billion cubic feet at end-March, seasonal injections of 2,310 billion cubic feet would be required from April through October to reach 3 trillion cubic feet (the approximate average end-October level between 1995 and 1999) before the next heating season. That kind of build would be about 500 billion cubic feet (25 percent) above average (1995-1999). Consequently we expect the industry to fall well short. Average monthly gas spot prices below $4 per thousand cubic feet between now and next winter are possible but do not seem very likely under these circumstances.

More good news for Northeast heating oil customers arrived since last month. Average residential heating oil prices fell to an estimated $1.32 per gallon in February from the $1.37 per gallon seen in January. This was 9 cents below the December average. The winter average is now expected to be $1.36 per gallon, 8 percent below the $1.48 price we projected as recently as January. Household heating oil expenditures for the winter will still be about 27 percent above last year’s estimated level, but this is certainly less dramatic than the 40 percent projected in January (Figure 2). Because of strong production and imports and a respite from the kind of abnormally cold weather seen at the beginning of winter, inventories of heating oil are now within the normal range. For natural gas consumers, the expected level of winter expenditures has not changed much. We still expect that the increase in household gas bills over last winter will amount to 70-75 percent (Figure 3).


Crude Oil Prices. The monthly average U.S. imported crude oil price in February was about $26 per barrel (almost $30 per barrel for West Texas Intermediate crude oil), about $1 per barrel higher than January's average U.S. imported crude oil price (Figure 1) .

Price declines during the past few weeks had indicated weakness in the near-term market. However, EIA believes that the OPEC 10's (OPEC excluding Iraq) decision to cut oil production quotas effective February 1 will provide enough support to maintain world oil prices near current levels. EIA does not believe that further quota cuts are necessary to maintain the OPEC basket oil price (roughly equivalent to the average U.S. imported crude oil price) within OPEC's target range of $22 - $28 per barrel in 2001 and 2002.

International Oil Supply. Although OPEC cut production quotas by 1.5 million barrels per day effective February 1, OPEC has suggested that further cuts could be needed to maintain the OPEC basket price within its desired range. In addition, some OPEC delegates have suggested that further quota cuts may be adopted even if the OPEC basket prices remain within this range, in part because of concerns that a seasonal second quarter decline in demand and a world economic slowdown could weaken the demand for OPEC oil. OPEC Secretary-General Ali Rodriguez was earlier quoted as saying that there was "almost a conviction" among producers for a production cut ahead of a forecasted drop in demand in the second quarter, with the cuts totaling up to 1 million barrels per day.

EIA's assessment does not factor in any further cuts in 2001 because EIA's analysis indicates that the February 1 quotas are sufficient to support OPEC's desired price range. The seasonal decline in demand during the second quarter is seen as a necessary accompaniment to the seasonal stock build normally associated with this time of year. EIA expects that oil stocks in the OECD countries will continue to be tight compared to normal levels and will provide enough support to prevent prices from falling significantly.

Iraqi efforts to end U.N. sanctions have continued to result in lowered exports and production since December. The U.N. reported that reduced Iraqi exports have resulted in a revenue loss of over $2.2 billion or $2.4 billion (euros) to the program since December 2000. Despite these revenue losses, EIA's projections assume that Iraqi efforts to end sanctions will continue in 2001 with negative consequences on Iraqi exports and production (Figure 4). Iraqi production in 2001 is not assumed to exceed the 3 million barrels per day level reached as recently as October 2000.

Non-OPEC production is expected to increase by another 0.7 million barrels per day in 2001, and another 0.9 million barrels per day in 2002. This represents an increase of 100,00 barrels per day from the previous Outlook, with the gain expected primarily from the former Soviet Union.

International Oil Demand. World oil demand is expected to continue to grow despite concerns over a gradual economic slowdown in the industrialized countries (Figure 5). However, EIA has lowered its projected world oil demand in 2001 by 100,000 barrels per day from the previous Outlook, reducing world oil demand growth to 1.5 million barrels per day in 2001. Non-OECD Asia is still expected to be the leading region for oil demand growth over the next two years.

World Oil Inventories. EIA does not attempt to estimate oil inventory levels on a global basis, however, the direction global oil inventories are headed is discerned from EIA's world oil supply and demand estimates. These estimates provide only a rough guide because of what has come to be known as the "missing barrels problem". The available limited data for tracking inventories suggest that inventories have not been building as fast as any of the global supply/demand estimates (including EIA's) would indicate, and that the inventory estimates are being overstated.

The most reliable inventory data are from the OECD countries. The data indicates that there was very little stockbuild in 2000 for these countries, which account for a little more than half of total world oil demand (Figure 6). However, EIA's global supply/demand estimates suggest that OECD inventories should have been building by almost 400,000 barrels per day in 2000. EIA's projections for OECD inventories are adjusted to reflect the assumption that the "missing barrels problem" will continue in 2001, but will be diminished by 2002. With this adjustment, OECD inventories are projected to grow relatively slowly in 2001 and 2002. EIA believes that this stock growth will be small enough to provide continued price support because inventories will continue to be low compared to levels required to provide normal coverage for forward demand.

EIA's evaluation of normal OECD stock levels accounts for both historical averages and increasing inventory requirements, reflecting world demand increases. For this reason, EIA's assessments of OECD stocks are more bullish for prices than those using just historical averages.

U. S. Energy Prices

Heating Oil. Retail heating oil prices have been sliding down from their winter peak of $1.41 per gallon last December. Our winter heating oil prices are expected to average around $1.36 compared to $1.39 in our previous Outlook. Nevertheless, retail heating oil prices have been quite high in historical terms. The national average price for the 4th quarter (October-December) of last year was almost 40 cents per gallon above the 1999 4th quarter price (Figure 7). Now that the heating season (October-March) is nearly over, we can be confident that retail heating oil prices have peaked for the winter, provided that no sustained crude oil price shocks occur over the next month. Warmer than normal weather for the first two months of the year accompanied by falling crude oil prices in December (dropping about $5.00 dollars per barrel from November) and January, have helped ease heating oil prices. Because of the relatively mild weather in the Northeast during the last half of January and portions of February, heating oil stock levels have stayed fairly steady over the past two months. For the first time since November 1999, U.S. distillate stocks are currently within bounds of the normal range (Figure 8). Also, heating oil production had been quite vigorous, running several hundred thousand barrels per day over last year's pace.

Motor Gasoline. Pump prices have dropped about 10 cents per gallon since last September, but will soon be heading back up as we enter the driving season in April. With crude oil prices gaining about $1.00 per barrel from their December lows, combined with lower than normal stock levels, we project that prices at the pump will rise to about $1.49 per gallon (for regular unleaded self-service) during the peak months of the driving season (Figure 9). For the summer of 2001, we are projecting an average price of $1.47 per gallon, compared to $1.53 seen during the previous driving season. Even though motor gasoline stocks during the driving season are projected to be slightly lower than they were a year ago (Figure 10), crude oil prices are also projected to be lower. Moreover, last year the high national average prices were skewed by exceedingly high pump prices in the Midwest (over $2.00 per gallon at times), which, in turn, were the result of critical regional supply problems. Although in our base we do not project a repeat of last year, the current situation of relatively low inventories for gasoline could once again set the stage for some regional imbalances in supply that could bring about significant price volatility in the U.S. gasoline market.

Natural Gas. Natural gas prices (Figure 11) began an ascent that originated last summer primarily in response to low levels of underground gas storage. Spot prices have increased well over $4.00 per thousand cubic feet since late June, even topping $10.00 per thousand cubic feet on several occasions this winter. The wellhead price this heating season is likely to end up more than double the price of last heating season. The length of time that gas prices have remained so high is unprecedented. Moreover, the current dynamics of the natural gas market leads us to believe that prices at the wellhead will not soon be returning to the low $2.00 per thousand cubic feet experienced just one year ago. The chief basis for our view is our outlook for robust levels of gas demand growth over the next two years, particularly in the electric power sector. By the year 2002, more than half of the increases in electricity generation are expected to come from natural gas. Furthermore, gas demand in the industrial sector (the single largest gas consuming sector) is also expected to make strong gains over the same time period. Although gas production and imports are expected to increase in the forecast period, we believe that the gains in supply will not be enough to bring the wellhead price down to the $2.00-3.00 range in the short-term.

We expect that winter (October 2000-March 2001) natural gas prices at the wellhead will end up averaging about $5.64 per thousand cubic feet. In our base case, residential prices for natural gas this winter would be about 46 percent higher than last year during that period. When the heating season ends next month, average wellhead prices are projected to decline, averaging about $4.05 per thousand cubic feet for the spring and summer. However, if the summer weather is exceedingly hot in regions that consume large quantities of gas-fired electricity, (California and Texas for example), then injections into underground storage for the next winter would be strained and prices could start rising more sharply and sooner than expected. In 2001, the annual average wellhead price is projected to be about $4.73 per thousand cubic feet. Next year, we expect the storage situation to improve modestly and with that, a decrease in the average annual wellhead price. Increases in production and imports of natural gas needed to keep pace with the rapidly growing demand for natural gas will be accompanied, for the time being, by relatively expensive supplies for gas due to rising production costs and capacity constraints on the pipelines.

Electric Utility Fuels. The rapid rise in gas prices last summer and fall has pulled delivered gas prices above heavy fuel oil prices on a cost per Btu basis (Figure 12). As this situation is likely to persist, we anticipate some recovery in the amount of oil used for power generation over the very low levels seen since late 1999. In 2001, the cost of coal to electric utilities is projected to increase slightly, after years of slow but continual decline, as coal, like oil, is being used more intensively for electricity generation in lieu of expensive or unavailable natural gas. On an inflation-adjusted basis, however, coal prices should still show a deadline this year.

U.S. Oil Demand

The recent release of December 2000 monthly data confirms the overall shrinkage in last year’s petroleum demand that had become increasingly apparent for the past several months. The data for last year show that shipments of petroleum products declined by 30,000 barrels per day despite substantial growth in major economic indicators for much of the year (Figure 13). Despite robust economic growth and the presence of colder-than-normal weather of the fourth quarter, petroleum markets were unable to overcome the effects of a record mild first quarter--the peak heating season--and the substantial increase in energy prices that eroded demand during the second half of the year.

Motor gasoline demand in 2000 fell by almost 50,000 barrels per day, reflecting a fractional decline in highway travel activity brought about by a 30-percent year-to-year increase in retail motor gasoline prices. Although highway travel declined during the third quarter---the peak driving season--from that of the previous year, the lagged effects of the earlier price increases and the moderation in economic growth resulted in an even larger year-over-year contraction in the fourth quarter. Despite a 10-percent hike in ticket prices in 2000, commercial jet fuel demand, buoyed by 6.5- and 4.5-percent increases in utilization and capacity, respectively, rose 3.5 percent. (The resultant 2-percent increase in load factor boosted consumption by constraining fuel-efficiency increases to only one percent, half the long-term average). Total jet fuel deliveries, which include corporate, military, and weather-related components, rose just 2.0 percent, down from 3.1 percent in the previous year. The record mild warm weather of the first quarter depressed shipments of jet fuel used as a blending component during the winter months. Distillate fuel oil demand grew by 3.2 percent in 2000 led mostly by strength in transportation diesel demand. Residual fuel shipments, highly sensitive to changes in relative prices, fluctuated wildly but managed to increase by 1.8 percent for the year as a whole. Following a year of double-digit increases, the combination of slowdowns in petrochemical activity, and mild weather resulted in a slight decline in the total demand for liquefied petroleum gas and oil-based petrochemical products.

During the forecast interval, total petroleum demand is projected to increase once again. Despite the current economic slowdown, growth in real disposable income is projected to be 3.1 percent in 2001, and a robust 4.6 percent in 2002. Petroleum prices, which are expected to decline slowly throughout the forecast interval, will not have the same kind of negative impact on demand this year that was brought about last year by large average price increases. Weather patterns are assumed to exhibit normal seasonality. In this environment, total petroleum demand is projected to increase by 260,000 barrels per day in 2001, accelerating to 443,000 barrels per day next year, a 1.8-percent average increase. Reversing last year’s declines, motor gasoline demand and highway travel activity are both expected to increase, but at an average of only 2.2 percent despite the steady downward trend in retail gasoline prices and robust growth in disposable income. Total jet fuel demand is expected to increase by an average 1.6-percent rate, with commercial demand rising by 3 percent. Distillate fuel demand is projected to rise by an average of 2.1 percent, down from the 3-percent average of the previous 2 years, due to a moderation in transportation demand. Demand for residual fuel oil is projected to continue to decline throughout the forecast interval, as declines in non-power generation demand offset a modest recovery in shipments to power generators.

U.S. Oil Supply

Average domestic oil production is expected to be flat in 2001, at a level of 5.83 million barrels of oil per day (Figure 14). For 2002, a 0.20 percent rise is expected to result in a production rate of 5.84 million barrels of oil per day average for the year.

In the Lower-48 States, oil production is expected to decline by 53,000 barrels per day to a rate of 4.80 million barrels per day in 2001,and followed by an decrease of 13,000 barrels per day in 2002. Oil production from the Mars, Troika, Ursa, and Brutus Federal Offshore fields is expected to account for about 8.2 percent of the lower-48 oil production by the 4th quarter of 2002.

Alaska is expected to account for about 18 percent of the total U.S. oil production in 2002. Its oil production is expected to increase by 5.6 percent in 2001 and by 2.4 percent in 2002. The gain in 2001 is the result of adding two new satellite fields, Colville River (Alpine) and Prudhoe Bay (Aurora) which contributed to the Alaska North Slope production. Initial rates from Alpine averaged 67,000 barrels per day during January and it is expected to peak at 80,000 barrels per day in mid-2001, while Aurora peak production should occur later in the year. Another satellite field, North Star, is expected to come on in early to mid-2002 and will peak at a rate of 65,000 barrels per day by year's end. A substantial portion of the oil production from Alaska comes from the giant Prudhoe Bay Field. As a result of maintenance, better well work, more development drilling, and better coordination of occasional down time, this field’s decline rate last year has changed from the usual 10 percent to only 3 percent per year. However, the field is expected to follow a steeper decline during this forecast period. Oil production from recent discoveries is expected to substantially offset the decline in oil production from the Prudhoe Bay field in the North Slope in 2001. Production from the Kuparuk River field plus like production from West Sak, Tabasco and Tarn fields is expected to stay at an average of 236,000 barrels per day in the 2001-2002 forecast period.

Natural Gas Demand and Supply

U.S. natural gas demand is expected to grow at about a 2.3-percent rate this year, following the strong 4.4-percent performance in 2000 ( Figure 15). A slowing economy and less rapid demand growth in the industrial and commercial sectors is the reason. Growth in 2002 is expected to heat up again to about 4.1 percent as the economy picks up again and as new gas-fired power generation requirements continue to mount.

Domestic gas production for 2001 and 2002 is expected to rise as production responds to the high rates of drilling experienced over the past year. Production is estimated to have risen by 3.1 percent in 2000 and it is forecast to continue to increase by 3.3 percent rate in 2001 and 2.5 percent in 2002.

According to the American Gas Association (AGA), during the week ending February 23, a total of 101 billion cubic feet (bcf) was withdrawn from storage, bringing the total of working gas to 26 percent full (Figure 16). Based on this information, we estimate that, on an EIA survey basis, working gas in storage at end-February will reach 901 billion cubic feet. From this we project that end-season (March 31) working gas will fall to 689 bcf. This level is more than 100 bcf above last month's projections. While this represents an improvement over previous estimates (and expectations for March spot prices have softened some over the last 2 months) such an end-season level would still represent the lowest recorded by EIA and is 38 percent below the previous 5-year average. We estimate that net injection, between April 1 and October 31, would have to be about 500 bcf (25 percent) above average to bring working gas to average pre-season levels for next winter. We think that only about 60 percent of the extra 500 bcf is likely during the injection season, so that a 200 bcf deficit relative to the 5-year average is likely at end-October.

Net imports of natural gas are projected to rise by about 15 percent in 2001 and by another 4 percent in 2002. For this winter, we expect net imports to be 6.6 percent higher than last winter's imports. The Alliance Pipeline began carrying gas from western Canada to the Midwest on December 1, having been delayed from its original October 2 opening. A new report by Canada's National Energy Board predicts that gas deliverability from Western Canada will rise by 1.1 bcf/d by 2002, due to the ongoing drilling boom. Western Canada supplies 15 percent of the gas consumed in the United States.

Electricity Demand and Supply

Total annual electricity demand growth (retail sales plus industrial generation for own use) is projected at about 2.3 percent in both 2001 and in 2002. This is compared with estimated demand in 2000 that was 3.6 percent higher than the previous year's level. Electricity demand growth is expected to be slower in the forecast years than it was in 2000 partly because economic growth is also slowing from its higher 2000 level.

This winter's overall heating degree-days (HDD) are assumed to be about 17 percent above last winter's HDD, which were well below normal. This is based on the very cold temperatures seen in November and December, the somewhat more moderate rise in HDD in January and February, as well as on the assumption that the less than one month remaining of winter will be normal. This winter, total electricity demand is expected to be up by 4.6 percent over last winter's level, driven by increased demand in the residential and commercial sectors, which are expected to be up by 8 and 4 percent, respectively (Figure 17 and Table 10).

In the fourth quarter of 2000, previously falling demand for oil-fired generation began to turn around as the price differential between natural gas and oil in the electricity generating sector shifted to favor oil, prompting those plants which can switch to oil to do so. This trend is projected to continue through first quarter 2001. Although the favorable price differential for oil relative to gas is expected to continue through the forecast period, by the second half of 2001, expected increases in gas-fired capacity are expected to keep gas demand for power generation growing.

Natural gas supply and deliverability problems in California for gas-fired electricity generation have helped to boost gas price to electric producers and other consumers. The situation in California is characterized by low gas storage, gas pipeline bottlenecks, high demand and low hydropower availability. These supply problems are following on last summer's supply problems with no obvious end visible over the next two years. Average California gas prices dramatically outstripped prices elsewhere in the country through December but have since been coming down as weather-related demand has eased up somewhat

-- Martin Thompson (, March 07, 2001

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