Prices
Crude Oil Prices. The spot price of Brent crude oil averaged $64 per barrel (b) in June, down from an average of $71/b in both April and May. The recent price declines largely reflect increasing uncertainty about global oil demand growth as a result of increasingly weak global economic signals. Weakening oil demand, combined with strong supply growth in the United States, has helped build global oil inventories so far in 2019 and has limited any sustained upward pressure on oil prices. In terms of price formation in recent months, these factors have outweighed decreasing supply in Venezuela and Iran, the extension of the OPEC+ agreement through the first quarter 2020, as well as Saudi Arabia’s continued over-compliance with the existing OPEC+ agreements.
EIA estimates that global petroleum and other liquid fuels inventories rose by an average of 0.7 million b/d in 2018 and by an estimated 0.2 million b/d in the first half of 2019. EIA expects that strong growth in U.S. and other non-OPEC liquid fuels production, combined with slowing global oil demand growth, will contribute to a balanced market in the second half of 2019 and inventory builds of about 0.1 million b/d in 2020.
Given the expectation of relatively balanced markets during the second half of 2019, EIA forecasts Brent crude oil prices will remain near current levels, averaging $67/b from July through December of this year.
EIA’s forecast of global oil inventory builds increasing in 2020 puts some downward pressure on oil prices. However, EIA assumes that the downward pressure will be mostly offset by upward price pressures as a result of the IMO 2020 regulations taking effect and that Brent crude oil prices will continue to average $67/b in 2020.
Daily and monthly average crude oil prices could vary significantly from annual average forecasts because global economic developments and geopolitical events in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast. EIA’s forecast assumes the OPEC+ agreement will remain in place through the end of the first quarter of 2020, with OPEC+ continuing to target a balanced market through the forecast period. However, the degree of adherence to those targets will be a significant driver of oil prices. In addition, supply disruptions are an ever-present feature of oil markets and can take large volumes off the global market. Venezuela and Libya are two places where events could cause production to drop quickly. Any disruptions to shipping through the Strait of Hormuz would also cause prices to increase.
Developments regarding the rate of economic growth and its effect on global oil demand further contribute to oil price uncertainty. During the third quarter, potential run reductions by refineries in China present a downside risk to crude oil prices. Also, although EIA expects crude oil price impacts from IMO 2020 to be limited, many unknowns remain about how the global refining and shipping industries will respond to the regulation and how those responses will affect crude oil prices. Finally, the U.S. tight oil sector continues to be dynamic, and quickly evolving trends in this sector could affect both current crude oil prices and expectations for future prices.
The discount of West Texas Intermediate (WTI) crude oil prices to Brent averaged about $10/b in May and June of 2019, but EIA expects that it will gradually fall to an average of $4/b by the fourth quarter of 2019. EIA forecasts average WTI crude oil prices to be $7/b lower than Brent prices in 2019 and $4/b lower than Brent prices in 2020. The price discount of WTI to Brent in the forecast is based on the assumption that increasing crude oil production in the Permian Basin and current constraints on the capacity to transport crude oil from production areas in West Texas and from Cushing, Oklahoma, to refineries and export terminals along the U.S. Gulf Coast will persist until the second half of 2019. At that point, EIA expects that new takeaway capacity will come online from West Texas to the Gulf Coast, which will reduce current distribution bottlenecks throughout Texas and Oklahoma.
The current values of futures and options contracts suggest significant uncertainty in the oil price outlook. WTI futures contracts for December 2019 delivery that were traded during the five-day period ending July 3 averaged $58/b, and implied volatility averaged 31%. These values established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in December 2019 at $40/b and $84/b, respectively.
Product Prices. EIA expects the retail price of regular gasoline in the United States to average $2.75 per gallon (gal) during the third quarter of 2019, 9 cents/gal lower than at the same time last year, primarily reflecting lower crude oil prices and lower refinery margins. EIA expects that the U.S. monthly retail price of regular gasoline will fall from a 2019 peak of $2.86/gal in May to $2.72/gal in June before rising slightly to an average of $2.77/gal in August.
EIA’s forecast increase in gasoline prices during the second half of the summer is driven in part by the announcement of the pending closure of the Philadelphia Energy Solution (PES) refinery in Philadelphia, Pennsylvania, following an explosion. The PES refinery is one of the largest and oldest refineries in the country, and it is a major supplier of gasoline to the Mid-Atlantic and Northeast regions. EIA assumes that this development will add some upward price pressure to gasoline prices through the summer. Because of the expected closure, EIA reduced its forecast for refinery distillation inputs from July 2019 through December 2020 by 210,000 b/d compared with the June STEO. However, EIA did not reduce refining capacity and so refinery utilization in this STEO is lower.
The U.S. regular gasoline retail price, which averaged $2.73/gal in 2018, is forecast to average $2.65/gal in 2019 and $2.76/gal in 2020.
EIA’s regional annual average forecast prices for 2019 range from a low of $2.34/gal in the Gulf Coast region—Petroleum Administration for Defense District (PADD) 3—to a high of $3.20/gal in the West Coast region (PADD 5).
Refinery wholesale gasoline margins in the United States (the difference between the wholesale price of gasoline and the price of Brent crude oil) averaged an estimated 32 cents/gal in June. This margin was lower than the 36 cents/gal average in June 2018 and 14 cents/gal lower than the five-year (2014–18) average for June. Refinery wholesale gasoline margins averaged 28 cents/gal in 2018, which was 12 cents/gal lower than the 2017 level and 7 cents/gal lower than the 2013–17 average. EIA expects refinery wholesale gasoline margin to average 29 cents/gal in 2019 and 35 cents/gal in 2020.
The diesel fuel retail price averaged $3.18/gal in 2018, which was 53 cents/gal higher than the average in 2017. EIA forecasts that the diesel price will average $3.10/gal in 2019 and $3.28/gal in 2020. The rising prices from 2019 to 2020 reflect EIA’s forecast increase in crude oil prices and increasing diesel refinery margins driven by impending IMO 2020 regulations. EIA expects that IMO 2020 regulations set to begin in 2020 will drive up global demand for U.S. ultra-low sulfur diesel and contribute to gradually increasing diesel refinery margins. Diesel refinery margins based on Brent crude oil, which averaged 44 cents/gal in 2018, are expected to average 46 cents/gal in 2019 and 66 cents/gal in 2020.
Natural Gas Prices. EIA forecasts that Henry Hub natural gas spot prices will average $2.50 per million British thermal units (MMBtu) in the second half of 2019 ($2.62/MMBtu for all of 2019) and $2.77/MMBtu in 2020.
Henry Hub spot prices dropped from an average of $2.64/MMBtu in May to an average of $2.40/MMBtu in June, with some daily prices in June falling below $2.30/MMBtu. The recent price declines reflect relatively mild weather in June that led to lower-than-expected natural gas-fired electricity generation (compared with EIA’s June STEO) and allowed natural gas inventory injections to outpace the five-year average rate.
EIA expects that monthly average prices will remain lower than $2.40/MMBtu through September 2019, when EIA expects storage injections to continue to outpace the five-year average. EIA expects that as supply growth begins to moderate in late-2019 and in 2020, it will put some upward pressure on prices. However, the forecast is temperature dependent. In the near term, warmer-than-forecast temperatures in the third quarter that increase natural gas-fired electricity generation could cause prices to be higher than EIA’s forecast. Similarly, although EIA forecasts Henry Hub prices will rise to an average of $3.05/MMBtu in January 2020, severely cold winter temperatures could cause prices to spike much higher, although a mild winter could keep prices at less than $3/MMBtu.
Natural gas futures contracts for December 2019 delivery that were traded during the five-day period ending July 3 averaged $2.57/MMBtu. Current options and futures prices indicate that market participants place the lower and upper bounds for the 95% confidence interval for December 2019 contracts at $1.64/MMBtu and $4.03/MMBtu, respectively.
Coal Prices. EIA estimates the delivered coal price to U.S. electricity generators averaged $2.06 per million British thermal units (MMBtu) in 2018. EIA forecasts that coal prices will be $2.10/MMBtu in 2019 and $2.12/MMBtu in 2020.
Electricity Retail Prices. EIA’s forecast U.S. retail electricity price for the residential sector averages 13.1 cents per kilowatthour in 2019, which is 1.5% higher than the average retail price in 2018. Forecast residential prices increase by an additional 1.1% in 2020. EIA expects commercial sector electricity prices to increase by 0.2% in 2019 and by 0.3% in 2020 and forecast industrial prices to decline by 1.2% this year and then rise by 1.3% in 2020.
