U.S. Crude Oil and Liquid Fuels

Total U.S. liquid fuels consumption during the first quarter of 2013 averaged 190,000 bbl/d higher than the same period last year, the first year-over-year increase in quarterly consumption in two years. Colder weather contributed to an estimated 280,000-bbl/d increase in liquefied petroleum gas and a 120,000-bbl/d increase in distillate fuel consumption. These gains were partially offset by declines in the other major petroleum products, including a 90,000-bbl/d drop in gasoline consumption.

The U.S. crude oil production forecast has been revised upward by 120,000 bb/d in 2013 and 310,000 bbl/d in 2014 from last month's STEO. Production will rise from an average of 7.1 million bbl/d in the first quarter of 2013 to 8.5 million bbl/d in the fourth quarter of 2014. The growing supply of domestic light crude oil in the Midcontinent has already prompted both midstream and downstream changes. Pipelines like Seaway that were once used to carry imported oil up from Gulf Coast ports to reach Midwest refiners have been reversed and are moving inland crude oil down to the Gulf, and their capacity is being dramatically expanded. New pipeline infrastructure is also under construction, including the southern portion of the Keystone XL project, which is slated to be in operation by year-end, and more has been proposed. There have also been major developments in rail transport, where shipments of crude increased dramatically in 2012 compared to 2011. Significant changes in the refining industry are expected over the next few years to accommodate this fast-growing domestic supply of light-sweet crude oil (see This Week in Petroleum, May 1, 2013).

U.S. Liquid Fuels Consumption

After relatively strong growth in the first quarter of 2013 because of cold weather, projected total liquid fuels consumption grows more modestly, increasing by an average 80,000 bbl/d (0.4 percent) in 2013 and unchanged in 2014. Motor gasoline and jet fuel consumption remain flat in 2013 and 2014 as forecast increases in travel growth are offset by fuel economy improvements. Distillate fuel oil consumption, which fell by 160,000 bbl/d (4.0 percent) in 2012, increases by 60,000 bbl/d (1.7 percent) in 2013 and 10,000 bbl/d (0.2 percent) in 2014. Liquefied petroleum gases consumption increases by 70,000 bbl/d in 2013 but then falls by 10,000 bbl/d in 2014.

U.S. Liquid Fuels Supply

EIA expects U.S. crude oil production to rise from an average 6.5 million bbl/d in 2012 to 7.4 million bbl/d in 2013 and 8.2 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.

EIA has increased its short-term forecast for U.S. Lower 48 states onshore oil production, largely because of 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 multiwell 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.

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, about $0.10 per gallon lower than forecast in last month's STEO. The projected monthly average regular retail gasoline price falls from $3.57 per gallon in April to $3.48 per gallon in September. Diesel fuel prices, which averaged $3.95 per gallon last summer, are projected to fall to an average of $3.88 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 August 2013 delivery traded over the five-day period ending May 2 averaged $2.73 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 August 2013 is about 11 percent.