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Short-Term Energy Outlook

Release Date: December 9, 2014  |  Next Release Date: January 13, 2015  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Prices

Global Crude Oil Prices

North Sea Brent crude oil spot prices averaged $79/bbl in November, down $8/bbl from the October average and the first month Brent crude oil prices have averaged below $80/bbl since September 2010. The combination of robust world crude oil supply growth and weak global demand has contributed to rising global inventories and falling crude oil prices (EIA, This Week in Petroleum, November 13, 2014). On November 27, following OPEC's decision to leave its crude oil production target unchanged, Brent crude oil spot prices fell by more than 10%, and have since fallen to $68/bbl as of December 4, the lowest daily price since May 25, 2010.

EIA expects global oil inventories to continue to build over the next year, keeping downward pressure on oil prices. The forecast Brent crude oil price averages $68/bbl in 2015, $15/bbl lower than projected in last month's STEO. Based on current market balances, EIA expects downward price pressures to be concentrated in the first half of 2015 when global inventory builds are expected to be particularly strong. EIA projects that Brent prices will reach a 2015 monthly average low of $63/bbl for each month from March through May, and then increase through the remainder of the year to average $73/bbl during the fourth quarter.

The monthly average WTI crude oil spot price fell from an average of $84/bbl in October to $76/bbl in November. Like Brent crude oil prices, WTI prices have decreased considerably, falling by more than 28% since reaching their 2014 peak at an average of $106/bbl in June. EIA now expects WTI crude oil prices to average $75/bbl in the fourth quarter of 2014 and $63/bbl in 2015, $5/bbl and $15/bbl lower than projected in last month's STEO, respectively. The discount of WTI to Brent crude oil is forecast to widen slightly from current levels, averaging $5/bbl in 2015.

However, the current values of futures and options contracts suggest high uncertainty in the price outlook (Market Prices and Uncertainty Report). WTI futures contracts for March 2015 delivery, traded during the five-day period ending December 4, averaged $67/bbl. Implied volatility averaged 32%, establishing the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in March 2015 at $51/bbl and $89/bbl, respectively. Last year at this time, WTI for March 2014 delivery averaged $96/bbl and implied volatility averaged 19%. The corresponding lower and upper limits of the 95% confidence interval were $82/bbl and $112/bbl.

The recent declines in oil price and associated increases in oil price volatility have created a particularly uncertain forecasting environment, and several factors could cause oil prices to deviate significantly from current projections. Among these is the responsiveness of supply to the lower price environment. Despite OPEC's recent decision to leave its crude oil production target at 30 million bbl/d, if crude oil prices continue to fall, Saudi Arabia and others could choose to cut production, tightening market balances. The level of crude oil production outages could also vary from forecast levels for a wide range of producers, including OPEC members Libya, Iraq, Iran, Nigeria, and Venezuela. Additionally, the price and lag time required to cause a reduction in forecast non-OPEC supply growth, particularly U.S. tight oil, is not known. 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 revenues to finance their fiscal budgets. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices continue to fall or are sustained at a lower level, then oil-dependent producers will have to make tough policy decisions. This could potentially lead to austerity programs and fuel subsidy cuts that could spark social unrest, leaving some countries vulnerable to supply disruptions if protestors target oil infrastructure. Potential new supply disruptions are a real possibility in a lower-than-expected price climate and present an uncertainty in the world oil supply forecast.

Petroleum Product Prices

U.S. average regular gasoline retail prices fell from a monthly average of $3.69/gal in June to $2.91/gal in November, the first month in which prices have averaged below $3.00/gal since December 2010. EIA expects that U.S. regular gasoline retail prices will fall to an average of $2.61/gal in December 2014. The U.S. regular gasoline retail price, which averaged $3.51/gal in 2013, is projected to average $3.37/gal in 2014 and $2.60/gal in 2015. Forecast retail gasoline prices for 2015 are $0.35/gal lower than in last month's STEO. Diesel fuel prices, which averaged $3.92/gal in 2013, are projected to fall to an average of $3.82/gal in 2014 and $3.07/gal in 2015. Forecast diesel fuel prices for 2015 are $0.31/gal lower than in last month's STEO.

The February 2015 New York Harbor reformulated blendstock for oxygenate blending (RBOB) futures contract averaged $1.85/gal for the five trading days ending December 4, 2014. An RBOB futures contract price of $1.85/gal is consistent with a monthly average regular-grade gasoline retail price less than $2.50/gal in March 2015. There is a 4% probability that the RBOB futures contract price at expiration may exceed $2.35/gal, consistent with a retail price of $3.00/gal or higher. 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 falling above or below the national average price by $0.30/gal or more.

Lower projected crude oil prices also contribute to a reduction in the forecast residential heating oil price and average household heating oil expenditures this winter compared to last winter. The average household that uses heating oil as its primary space heating fuel is expected to pay an average of $3.09/gal this winter, $0.79/gal lower than last winter. The average household is now expected to spend $1,722 for heating oil this winter, $57 lower than in last month's STEO.

Figure 2: U.S. Gasoline and Crude Oil Prices

Natural Gas Prices

The Henry Hub natural gas spot price averaged $4.12/MMBtu in November, an increase of 34 cents from October. EIA expects spot prices to remain above $4/MMBtu through January. Projected Henry Hub natural gas prices average $4.44/MMBtu in 2014 and $3.83/MMBtu in 2015.

Natural gas futures prices for March 2015 delivery (for the five-day period ending December 4) averaged $3.84/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for March 2015 contracts at $2.40/MMBtu and $6.13/MMBtu, respectively. At this time last year, the natural gas futures contract for March 2014 averaged $3.98/MMBtu and the corresponding lower and upper limits of the 95% confidence interval were $3.01/MMBtu and $5.26/MMBtu.

Coal Prices

The annual average coal price to the electric power industry fell from a historically high $2.39/MMBtu in 2011 to $2.35/MMBtu in 2013. EIA expects the average delivered coal price to be $2.36/MMBtu in 2014 and remain at that level in 2015.

Electricity Retail Prices

EIA expects the U.S. residential price to average 12.5 cents per kilowatthour in 2014, which is 3.0% higher than the average last year. Prices increase in all regions of the country except along the Pacific Coast. Average U.S. residential electricity prices grow at a slower rate of 1.7% in 2015.

Prices
  2012 2013 2014 2015
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)
94.12 97.91 93.82 62.75
Brent Crude Oil
(dollars per barrel)
111.65 108.64 99.54 68.08
Gasolineb
(dollars per gallon)
3.63 3.51 3.37 2.60
Dieselc
(dollars per gallon)
3.97 3.92 3.82 3.07
Heating Oild
(dollars per gallon)
3.79 3.78 3.70 2.96
Natural Gasd
(dollars per thousand cubic feet)
10.65 10.30 10.97 10.96
Electricityd
(cents per kilowatthour)
11.88 12.12 12.47 12.69
Coale
(dollars per million Btu)
2.38 2.35 2.36 2.36

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