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Short-Term Energy and Summer Fuels Outlook

Release Date: April 7, 2015  |  Next Release Date: May 12, 2015  |  Full Report    |   Text Only   |   All Tables   |   All Figures


Global Crude Oil Prices

North Sea Brent crude oil spot prices decreased by $2/bbl in March to a monthly average of $56/bbl. This decrease followed a $10/bbl increase in February, the first increase in eight months. Several factors put upward pressure on Brent prices in February, including news of falling U.S. crude oil rig counts and announced reductions in capital expenditures by major oil companies. This upward price pressure abated in March, as the combination of robust world crude oil supply growth and weak global demand contributed to an increase in the rate of global inventory builds. Total global oil inventories are estimated to have increased by 2.1 million bbl/d in March, compared with a 0.9 million bbl/d increase in February. Strong global oil inventory builds are expected to continue in the coming months. Inventory builds are projected to moderate later in the year and provide support to crude oil prices.

The monthly average WTI crude oil spot price decreased to an average of $48/bbl in March, down $3/bbl from February. WTI prices fell in March in large part because of commercial crude oil inventories in Cushing, Oklahoma, which increased to a record 58.9 million barrels as of March 27. The record inventory levels have put downward pressure on the price of crude oil for prompt delivery compared with the price of crude oil for delivery in later months.

EIA projects the Brent crude oil price will average $59/bbl in 2015, unchanged from last month's STEO, with prices rising from an average of $56/bbl in the second quarter to an average of $67/bbl in the fourth quarter. The Brent crude oil price is projected to average $75/bbl in 2016. However, this price projection remains subject to the uncertainties surrounding the possible lifting of sanctions against Iran and other market events (see analysis box below). WTI prices in 2015 and 2016 are expected to average $7/bbl and $5/bbl, respectively, below Brent. The Brent-WTI spread for 2015 reflects continued large builds in U.S. crude oil inventories, including at the Cushing, Oklahoma, storage hub.

The current values of futures and options contracts continue to suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for July 2015 delivery traded during the five-day period ending April 2 averaged $52/bbl while implied volatility averaged 46%, establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in June 2015 at $35/bbl and $78/bbl, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $32/bbl and $97/bbl for prices in December 2015. Last year at this time, WTI for July 2014 delivery averaged $99/bbl, and implied volatility averaged 17%. The corresponding lower and upper limits of the 95% confidence interval were $85/bbl and $115/bbl.

Given the high level of uncertainty in oil markets, several factors could cause oil prices to deviate significantly from current projections. Among these factors is the potential lifting of sanctions against Iran if a comprehensive agreement is reached (see box below). The level of unplanned production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Nigeria, and Venezuela. The degree to which non-OPEC supply growth is affected by lower oil prices will also affect market balances and prices.

Several OPEC and non-OPEC oil producers rely heavily on oil revenue to finance their national budgets. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices fall further or are sustained at current levels, oil-dependent producing countries will face tough decisions. These decisions could potentially lead to austerity programs and fuel subsidy cuts that could spark social unrest, leaving some countries vulnerable to supply disruptions if protesters target oil infrastructure. Potential new supply disruptions are a real possibility and present major uncertainty in the world oil supply forecast.

U.S. Gasoline and Diesel Fuel Prices

EIA expects that regular-grade gasoline retail prices will average $2.45/gal during the 2015 summer driving season (April through September), down from an average of $3.59/gal last summer. The projected monthly average regular retail gasoline price falls from $2.50/gal in April to $2.43/gal in September. Diesel fuel retail prices are projected to average $2.77/gal this summer, down from an average of $3.89 last summer. Daily and weekly national average prices can differ significantly from monthly and seasonal averages, and there are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by $0.40/gal or more. Any unforeseen refinery outages or other disruptions to supply also have the potential to increase regional product prices beyond forecast levels in the short term.

Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are driven primarily by changes in both crude oil prices and wholesale margins. The retail price projections reflect slowly rising prices for crude oil, best represented by the Brent crude oil price, which will average about $58/bbl ($1.39/gal) this summer compared with an average of $106/bbl ($2.52/gal) last summer. Any difference between actual crude oil prices and EIA's forecast would be reflected in the retail price of motor fuels. Absent other factors specific to the gasoline and diesel fuel markets, each dollar per barrel of sustained change in crude oil prices compared with the forecast translates into approximately a 2.4-cent-per-gallon change in product prices.

EIA expects wholesale gasoline margins (the difference between the wholesale price of gasoline and the Brent crude oil price) will average 36 cents/gal this summer, less than 1 cent/gal higher than last summer and 2 cents/gal higher than the previous five-summer average. Forecast wholesale diesel fuel margins are 45 cents/gal, about 3 cents/gal above last summer's level and 4 cents/gal higher than the previous five-summer average.

As in the case of crude oil, the market's expectation of uncertainty in monthly average gasoline prices is reflected in the pricing and implied volatility of futures and options contracts. New York Harbor RBOB futures contracts for July 2015 delivery traded over the five-day period ending April 2 averaged $1.77/gal. The probability that the RBOB futures price will exceed $2.35/gal (consistent with a U.S. average regular gasoline retail price above $3.00/gal) in July 2015 is about 5%.

Natural Gas Prices

The Henry Hub natural gas spot price averaged $2.83/MMBtu in March, a decline of 4 cents/MMBtu from February. EIA expects monthly average spot prices to remain less than $3/MMBtu through May, and less than $4/MMBtu through the remainder of the forecast. The projected Henry Hub natural gas price averages $3.07/MMBtu in 2015 and $3.45/MMBtu in 2016.

Natural gas futures contracts for July 2015 delivery traded during the five-day period ending April 2 averaged $2.76/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for July 2015 contracts at $1.90/MMBtu and $4.00/MMBtu, respectively. At this time last year, the natural gas futures contract for July 2014 delivery averaged $4.46/MMBtu and the corresponding lower and upper limits of the 95% confidence interval were $3.40/MMBtu and $5.87/MMBtu.

Figure 4: Henry Hub Natural Gas Price

Coal Prices

The annual average coal price to the electric power sector fell from $2.39/MMBtu in 2011 to an estimated $2.36/MMBtu in 2014. EIA expects the delivered coal price to average $2.31/MMBtu in 2015 and $2.33/MMBtu in 2016.

Electricity Retail Prices

Residential electricity rates in New England have continued to increase, with the January 2015 price averaging about 10% more than the price in November 2014. For the United States as a whole, EIA expects continued growth in average residential electricity prices over the forecast period, albeit at a slower pace than last year. The U.S. retail residential price is projected to increase by 1.4% in 2015 and by 1.8% in 2016.

  2013 2014 2015 2016
a West Texas Intermediate.
b Average regular pump price.
c On-highway retail.
d U.S. Residential average.
e Electric power generation fuel cost.
WTI Crude Oila
(dollars per barrel)
97.91 93.26 52.48 70.00
Brent Crude Oil
(dollars per barrel)
108.60 99.00 59.32 75.03
(dollars per gallon)
3.51 3.36 2.40 2.73
(dollars per gallon)
3.92 3.83 2.86 3.24
Heating Oild
(dollars per gallon)
3.78 3.72 2.81 3.04
Natural Gasd
(dollars per thousand cubic feet)
10.30 10.94 10.33 10.61
(cents per kilowatthour)
12.12 12.50 12.68 12.90
(dollars per million Btu)
2.34 2.36 2.31 2.33

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