U.S. Crude Oil and Liquid Fuels

Despite only slight increases in Brent crude oil prices in May, refinery outages across the Midwest helped bring the U.S. average regular gasoline retail price up from $3.52 per gallon on April 29, 2013 to $3.65 per gallon on June 3. The expected recovery in refinery production combined with lower crude oil prices contributes to lower projected regular gasoline retail prices, averaging $3.40 per gallon in the second half of 2013 and $3.37 per gallon in 2014. The current values of futures and options contracts suggest that prices could differ significantly from this forecast. For example, there is a 12-percent probability that the New York Harbor reformulated gasoline blendstock for oxygenate blending (RBOB) futures price will exceed $3.10 per gallon (consistent with a U.S. average regular gasoline retail price above $3.75 per gallon) in September 2013.

U.S. Liquid Fuels Consumption

In 2012, total liquid fuels consumption declined 390,000 bbl/d (2.1 percent). During the first quarter of 2013, total liquid fuels consumption rose by 180,000 bbl/d compared with the same period last year, led by increases in liquefied petroleum gas and distillate consumption. Much of that increase was due to weather, with heating degree days in the Northeast 21 percent higher than the mild first quarter seen last year. For the year as a whole, the forecast of total liquid fuels consumption increases by an average 90,000 bbl/d, followed by a slight decline in 2014. Motor gasoline consumption remains flat during the forecast interval as continued increases in vehicle fuel efficiency offset gains in motor vehicle travel.

U.S. Liquid Fuels Supply

EIA expects U.S. crude oil production to rise from an average of 6.5 million bbl/d in 2012 to 7.3 million bbl/d in 2013 and 8.1 million bbl/d in 2014. Drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian Basins is expected to account for the bulk of forecast production growth over the next two years.

One current driver of production growth through 2014 is the continued exploration success seen in some of the major plays in the Permian Basin. Operators in the Bone Spring, Spraberry, and Wolfcamp plays are achieving greater success in finding sweet spots and hydraulically fracturing horizontal wells. EIA expects improvements in drilling and completing horizontal wells from multi-well drilling pads in the Permian Basin, which give operators greater access to large areas of resources in a number of stacked plays from a single surface location.

Gulf of Mexico oil production estimates have been revised downward by 160,000 bbl/d in May and 270,000 bbl/d in June from last month's STEO. Maintenance at the BP natural gas processing plant in Pascagoula, Mississippi, and on the NaKika offshore platform lowered production in May and early June. The Pascagoula plant is back in operation, and the NaKika system is scheduled to ramp up production by mid-June. Additional shut-in oil production will occur in June as Shell installs a new platform as part of the Mars B project, slated to begin producing during 2015.

The NOAA Atlantic Hurricane Season Outlook predicts that the Atlantic Basin likely will experience above-normal tropical weather activity during the current hurricane season. EIA estimates that the median outcome for shut-in crude oil production in the federally administered Gulf of Mexico because of disruptions during the 2013 hurricane season is 19 million barrels. There is a wide range of uncertainty around this forecast (see the 2013 Outlook for Hurricane-Related Production Outages in the Gulf of Mexico). EIA's simulation results indicate a 58‐percent probability of offshore crude oil production experiencing outages during the current hurricane season that are equal to or larger than the 14 million barrels of production shut in during the 2012 hurricane season.

Since reaching 12.5 million bbl/d in 2005, total U.S. liquid fuel net imports, including crude oil and petroleum products, have been falling. Total net imports fell to 7.4 million bbl/d in 2012, and EIA expects imports to continue declining to an average of 5.7 million bbl/d by 2014. Similarly, the share of total U.S. consumption met by liquid fuel net imports peaked at more than 60 percent in 2005 and fell to an average of 40 percent in 2012. EIA expects the net import share to fall to 30 percent in 2014, which would be the lowest level since 1985.

U.S. Petroleum Product Prices

EIA expects that regular-grade gasoline retail prices, which averaged $3.69 per gallon last summer, will average $3.53 per gallon during the current summer (April through September) driving season. The projected monthly average regular retail gasoline price falls from $3.61 per gallon in May to $3.43 per gallon in September. Diesel fuel prices, which averaged $3.95 per gallon last summer, are projected to average $3.83 per gallon this 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 30 cents per gallon or more.

As is the case with 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 September 2013 delivery traded over the five-day period ending June 6 averaged $2.76 per gallon. The probability that the RBOB futures price will exceed $3.10 per gallon (consistent with a U.S. average regular gasoline retail price above $3.75 per gallon) in September 2013 is about 12 percent.