# Presentation: 672031

## Short-Term Energy Outlook 

***Short-Term Energy Outlook ***
***October 2000***
**Outlook for Winter Fuels**
**Presented by:  Mark J. Mazur**

**Energy Information Administration**
**United States Department of Energy**

**Friday, October 6, 2000**

**2000 EIA/NASEO Winter Fuels Conference**

## WTI Crude Oil Price:  Base Case and 95% Confidence Interval

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**WTI Crude Oil Price:  Base Case and 95% Confidence Interval**

**Notes:**
WTI prices are now estimated to have averaged $33.88 per barrel for the month of September, more than $2 per barrel above the August 2000 price but well below the daily averages (over $37 per barrel) reached prior to the Clinton Administration’s announcement of a limited swap of oil from the Strategic Petroleum Reserve on September 22.

EIA estimates that the SPR swap will make an additional 10 million barrels of crude oil available to refineries in the United States for replenishing crude oil stocks or for processing into refined products in the near term.  The rest will augment world crude oil supplies by displacing imports.

While the Administration’s move is likely to improve the prospect of seeing some badly needed enhancement to U.S. fuel oil stocks this winter, crude oil and distillate fuel oil inventories remain very tight by historical standards.  Abnormally cold weather this winter could have a marked upward impact on crude prices during the winter period, particularly if cold patterns are experienced broadly throughout the Northern Hemisphere.  In the case of a sustained period of very cold weather, we would expect crude oil prices to swing up toward the high end of the 95% confidence range indicated in the chart.

## U.S. Crude Oil Stocks

**U.S. Crude Oil Stocks**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Notes:**
U.S. crude oil stocks (excluding the SPR) stood at about 285-290 million barrels on October 1.  EIA’s weekly survey  indicated that domestic commercial crude oil stocks amounted to 287 million barrels as of September 29.  This puts them about 17 million barrels below the level seen at the same time last year.  This is an improvement over the deficit seen last month (26 million barrels) but still indicates crude stocks well below normal (8 percent).  The current outlook for crude stocks has improved since last month, particularly in view of the SPR swap.  However, we still do not expect crude stocks to move into the normal range before the end of winter.

When viewed in terms of days supply, commercial crude oil stocks in the United States have been below 19 days since May, a range which is well below average.  Current crude stocks on hand in terms of days of required throughputs is, by our estimate, approximately 18.8 days.  The average over the last 10 years for end-September has been slightly over 23 days.  Under normal weather conditions and undisrupted oil production increases from OPEC and other sources, we expect the relative position of U.S. crude oil stocks to improve somewhat this winter.  As a result, we expect days supply to be at or slightly above 20 days over the next six months.

## Regular Gasoline Price:  Base Case and 95% Confidence Interval

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Regular Gasoline Price:  Base Case and 95% Confidence Interval**

**Notes:**
The monthly average price for regular gasoline in the United States is 
estimated to have been $1.55 per gallon in September.  This represents an 8 
cents-per-gallon drop from peak summer levels (reached in June) of $1.63 per 
gallon.  It was an equally large increase from the $1.47 reached in August.  
The mid summer slide in prices resulted from the amelioration of 
extraordinary supply difficulties in the Midwest and weakening crude prices.  
Last month's rise came mostly due to resurgent crude oil prices.

Current market conditions suggest that our long-held view of gradually 
declining motor gasoline prices through the end of the year and into next 
spring is likely to be the appropriate frame of reference for the near term 
price outlook.  We expect the average pump price for regular gasoline to be 
about $1.46 per gallon in December and  about $1.40 by next March.  If this 
base case scenario plays out, March 2001 could mark the first month since March 1999 that gasoline prices posted a decline on a year-over-year basis.

## Retail Diesel Price:  Base Case and 95% Confidence Interval

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Retail Diesel Price:  Base Case and 95% Confidence Interval**

**Notes:**
U.S. diesel fuel prices averaged an estimated $1.64 per gallon in September, up 42 cents per gallon from September 1999 on the strength of crude oil prices, strong transportation-related demand and tight distillate supplies in general.  We see diesel prices falling by about 9 cents to an average of $1.55 per gallon in December and to an average of about $1.35 per gallon by next summer.

In the base case, the drop in crude oil prices and the expectation of improved oil inventory positions next year leads to an anticipated easing of diesel prices through next spring.  Higher average prices could emerge, however, if crude prices stay high or surge upward again or if particular demand factors tighten the distillate market.  

Of particular interest is the possibility that very cold winter weather could cause sharp increases in Northeast heating oil prices that could spill over into East Coast diesel markets.  We believe that the potential for this phenomenon to occur (which was seen last winter in late January and early February) is greater this year than normal because of currently tight distillate supplies, particularly in the Northeast.

## OPEC Crude Oil Production 1999-2001

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**OPEC Crude Oil Production 1999-2001**

**Notes:**
At its June meeting, the OPEC 10 (Organization of Petroleum Exporting Countries excluding Iraq) agreed to increase their production quotas by 708,000 barrels per day beginning July 1. On September 10, the group further increased production quotas by 800,000 barrels per day.  After these latest rounds of quota adjustments and production increases, we believe only Saudi Arabia  and  the United Arab Emirates will have significant capacity to expand production in the short run. 

What is agreed to formally in the OPEC process and what is effectively occurring in the market are generally different things.  The net effect of the series of agreements reached through September of this year is:  OPEC production (all liquids) reached an estimated 31.9 million barrels per day (mmbd) in Q3 2000, 1.2 mmbd above Q2 2000 and 2.7 mmbd above Q3 1999.  We expect production to increase to 32.4 mmbd in Q4 2000, which would represent an increase of 3.7 million mmbd on a year-over-year basis. Expected increases next year would yield a 1.0 mmbd increment in OPEC production in 2001 over 2000.

Iraqi crude oil production is estimated to have increased from 2.7 mmbd in Q2 2000 to 2.8 mmbd in Q3.  Although Iraqi production fell during June-July as a result of logistical and marketing problems, Iraqi oil production is projected to increase to 3.0 million barrels per day through the remainder of the year, and further increase to 3.2 million barrels per day by end-2001.

## Annual World Oil Demand 

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**(Changes from Previous Year)**

**Annual World Oil Demand **

**Notes:**
World oil demand is expected to increase by 1.1 million barrels per day in 2000 over 1999 levels. Almost all of this increase is projected to come from non-OECD countries, particularly in Asia, although near-term growth rates there are unlikely to match those seen in the early to mid 1990s. 

In 2001, non-OECD oil demand expected to continue to grow, and OECD oil demand growth is expected to be strong as well, with much of the demand growth coming from the United States. For 2001, overall world oil demand is expected to be 78 million barrels per day, about 2 million barrels per day above the level in 2000.

## Natural Gas Spot Prices:  Base Case and 95% Confidence Interval

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Natural Gas Spot Prices:  Base Case and 95% Confidence Interval**

**Notes:**
Average spot prices for natural gas are estimated to have averaged about $4.96 per thousand cubic feet (mcf) in September, nearly double the price from one year ago.  The year-over-year differential is likely to widen by year-end.  Minimal production growth, high demand related to power generation and  rising crude oil prices (i.e., limited availability of oil as an alternative to natural gas as a fuel) have contributed to rising  gas prices, particularly since early spring 2000.  Average gas wellhead prices, which include some short- to longer-term contract volumes, may lag spot price increases for a time.  National average residential prices are expected to be about 30% above last winter’s levels.

U.S. working gas in storage is estimated to be about 9 percent below normal and about 12 percent below the year-ago level.  Increases in gas production this year have been minimal, according to preliminary data, and have failed to keep pace with demand as storage injections have trailed normal rates for most of the season.

A normal weather (or colder) scenario for the upcoming winter will test the U.S. supply system and result in higher spot gas prices.  We estimate, based on previous spot gas price responses to actual or expected increases in demand under relatively tight supply situations, that wellhead gas prices could reach or exceed the upper level of the uncertainty band indicated in the chart under severe (10% colder-than-normal) winter weather during peak demand periods this winter.

## U.S. Winter Natural Gas Demand

**(Year-to-Year Percent Change)**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**U.S. Winter Natural Gas Demand**

**Notes:**
Negative or minimal growth in domestic residential gas demand has been the hallmark of recent winters.  A cold snap in late January 2000 is probably the only factor that kept residential gas demand growth in positive territory last year, a winter which, by heating-demand measures like aggregate gas-weighted heating degree-days, was one of the warmest on record.

Normal weather this winter would be expected to yield 10%-11% higher demand in the residential and commercial sectors compared to the winter of 1999-2000.  Total gas demand would be expected to rise by about 5%.  That expected increase represents more than 3 billion cubic feet (bcf) per day, well above likely increases in North American new supply, and a potential drain on already below-normal inventories.

It should not be forgotten that the potential for much higher heating demand than what has been seen in recent years puts both direct (gas space heating) and indirect (electric space heating supplied partially from gas-fired generators) pressure on the gas market.  With oil markets still tight, a relatively high winter electric load will add to fossil fuel price pressures.  

## Working Gas in Storage

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Working Gas in Storage**

**Notes:**
The level of gas in storage at the end of the last heating season (March 31, 2000) was 1,150 bcf, just above the 1995-1999 average of 1,139 bcf.

However, storage injection rates since April 1 have been below average, resulting in working gas storage at 2,530 billion cubic feet as of October 1 (an estimated 9-percent shortfall compared to the 5-year average for total stocks at this time of year).

We estimate that additional net injections this year will result in gas inventories of  2,766 bcf on November 1, which is about 8 percent below the 5-year average of about 3,000 bcf.  Barring unexpectedly high incremental rates of new supply between now and mid winter, we anticipate that gas storage levels by the end of the withdrawal season (about 890 bcf by March 31, 2001) will be the lowest since March 1996, when working gas storage fell to 758 bcf.  

If there are no major problems in gas markets this winter, we see noticeably moderating prices in late winter and spring 2001.  A crucial supply issue this winter centers around just how much in net new gas supply to the United States will be forthcoming due to the opening of the Alliance pipeline from Canada to the Midwest U.S. market.  A high rate of fill on this pipeline without displacement off the TransCanada system could yield another winter with double-digit growth in Canadian exports to the United States.  These increased supplies could take some pressure off low storage levels.

## 97-98

***Average Midwest Household, U.S. Prices***

**97-98**

**98-99**

**99-00**

**00-01**

**Actual**

**Actual**

**Actual**

**Fcst**

***Mcf***

***82.4***

***84.5***

***81.7***

***90.9***

***$541***

***$530***

***$540***

***$780***

***($/Mcf)***

***$6.56***

***$6.27***

***$6.61***

***$8.58***

**Source: Energy Information Administration**

***Cost ($)***

**Consumer Natural Gas Heating Costs**

**Notes:**
Mild weather has minimized residential gas consumption over most of the past 3 winters.  Our projections for normal winter weather mean about 10 percent greater demand this winter compared to last year.

Unlike heating oil, average increases in natural gas prices last winter were relatively small.

The combination of higher consumer prices and sharp demand increases expected under normal weather suggests an increase in gas home heating costs  of between 40 and 50 percent this winter.  Our projections imply natural gas customers would be expected to pay about $240 more this winter for heat than last year.  In the case of extremely cold weather, winter gas bills could be even higher.

## Residential Heating Oil Prices:  Base Case and 95% Confidence Interval

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Residential Heating Oil Prices:  Base Case and 95% Confidence Interval**

**Notes:**
U.S. residential heating oil prices averaged an estimated $1.34 per gallon in September, approximately 44 cents per gallon above the price in September 1999.  Gradually declining crude oil prices and winter weather patterns close to normal conditions may limit additional increases through the winter peak demand period to as little as 5 cents per gallon (base case).  Base case conditions would be expected to yield average winter retail prices of $1.37 per gallon, compared to $1.18 per gallon last winter.  Year-over-year increases would be particularly significant in this year’s fourth quarter.

An extreme weather scenario (10% colder than normal on average and sustained for the winter) would be likely to cause extremely sharp heating oil price runups, particularly in the Northeastern United States.  Based on somewhat limited observations involving heating oil price reactions to observed or anticipated weather-related demand increases under conditions of low stocks, we estimate that the sustained cold weather scenario considered here could generate peak average heating oil prices above the upper range shown in the chart. Such an outcome is unlikely but is a realistic estimate of the prices one could expect under sustained cold conditions in the Northern Hemisphere this winter.

## U.S. Total Distillate Fuel Stocks

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**U.S. Total Distillate Fuel Stocks**

**Notes:**
When EIA’s demand forecast is combined with its outlook for production and net imports, distillate stocks are projected to remain low for the rest of the year.
- Stocks are beginning at very low levels.  The October 1 distillate fuel stock level (estimated at between 114-118 million barrels) is about 15%-18% less than last year, and about 10%-13% below the 10 year average for end of September levels.  But stocks on the East Coast, at about 41 million barrels, are nearly 40% behind year-ago levels, and about a similar percentage below average levels.  We should note that we expect higher distillate volumes (3 to 5 million barrels) to make their way into stocks before mid winter as a result of the SPR swap planned to begin (on a physical basis) in October and finish in November).

Over the last 10 years, the average stock build from the end of September through the end of November has been about 5 million barrels.  We are forecasting about an 11 million barrel build, which, while above normal, does not quite reach the normal band.  Forecast stocks peak at the end of November at 130 million barrels, about 10 million barrels below the bottom of the normal band.  This is a higher peak level than we were predicting last month and, if the financial incentives prove favorable, we believe that U.S. suppliers can actually do better than that with higher crude runs and distillate yields than are projected for the base case.

## 97-98

***Average Northeast Household Heating With Oil***

**97-98**

**98-99**

**99-00**

**00-01**

**Actual**

**Actual**

**Actual**

**Base Fcst.**

***Gal***

***636***

***650***

***644***

***693***

***$585***

***$520***

***$760***

***$949***

***$/gal***

***$0.92***

***$0.80***

***$1.18***

***$1.37***

***Cost ($)***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Consumer Winter Heating Oil Costs**

**Notes:**
Using the Northeast as a regional focus for heating oil, the typical oil-heated household consumes about 690 gallons of oil during the winter, assuming that weather is “normal.”

The previous three winters were warmer than average and generated below  normal consumption rates.  Last winter, consumers saw  large increases over the very low heating oil prices seen during the winter of 1998-1999 but, outside of  the cold period in late January/early February they saw relatively low consumption rates due to generally warm weather.

Even without particularly sharp cold weather events this winter, we think consumers are likely to see higher average heating oil prices than were seen last winter.  If weather is normal, our projections imply Northeast heating oil customers would be expected to pay about $190 more this winter for heat than last year.

Even higher fuel bills are possible under very cold weather conditions.

## Residential Propane Prices:  Base Case and 95% Confidence Interval

**Sources: History:  EIA;  Projections: EIA Office of Oil and Gas**

**Residential Propane Prices:  Base Case and 95% Confidence Interval**

**Notes:**
Despite a strong stock build during the spring and summer months, spot propane prices increased significantly in response to the rise in crude oil prices and anticipated demand.  

For the upcoming winter season, propane prices are therefore expected to be substantially higher compared with last year. Under the base-case scenario, residential prices are expected to average $1.16 per gallon compared to $1.02 last winter, a 14% increase.  Even higher prices are likely to be observed if the upcoming winter is significantly colder than normal. 

## U.S. Propane Stocks

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**U.S. Propane Stocks**

**Notes:**
Our data show that U.S. inventories of propane at end September 2000 were about 62 million barrels, actually ahead of last year’s level at this time by 3 million barrels.  This level is slightly below average but, nationally at least, coincides with typical requirements for a normal winter.

The U.S. stock build for the 2000-2001 heating season measured approximately  40 million barrels, surpassing the 5-year average by about 8%-10%.   Moreover, U.S. inventories remain  within the normal range at the start of the 2000-2001 heating season.

Regional inventories remain mixed with East Coast and Gulf Coast inventories at the upper limit of their respective normal ranges as of September 30, while inventories in the Midwest region continued to track somewhat below the normal range for this same period. We believe that propane stocks are in relatively good shape and that any regional disparities can be fairly quickly eliminated by redistribution from the Gulf Coast region (or other supply centers)  to the demand centers.  

One potential development that could reduce propane supplies for heating is excess crop-drying demand. The U.S. Department of Agriculture (USDA) is forecasting a record corn crop ever at nearly 10.4 billion bushels. If the moisture content of the corn is high, the impact of below-normal inventories in the Midwest could bring about some market volatility during the fourth quarter.

## 97-98

***Average Midwest Household, U.S. Prices***

**97-98**

**98-99**

**99-00**

**00-01**

**Actual**

**Actual**

**Actual**

**Base Fcst**

***(gals)***

***814***

***835***

***807***

***898***

***$765***

***$710***

***$823***

***$1,045***

***($/Gal)***

***$0.94***

***$0.85***

***$1.02***

***$1.16***

**Source: Energy Information Administration**

***Cost ($)***

**Consumer Propane Heating Costs**

**Notes:**
As is the case for other heating fuels, we expect to see substantial increases in fuel bills for customers using propane for heat this winter, in large part because we expect to see higher heating demand (colder average temperatures) this winter than last year.  Also, higher crude oil costs have increased the cost of making propane and thus increased propane prices.

In the base case, we expect household that use propane to heat their homes to see a 27% increase in winter fuel bills, compared to last year.

If winter temperatures are above normal, we could see a further increase.

## Electricity Sales by Sector

**Source: History:  EIA;  Projections: Short-Term Energy Outlook, October 2000.**

**Electricity Sales by Sector**

**Notes:**
Annual electricity demand growth is projected to be 2.5 percent in 2000 and 1.9 percent in 2001. This is in line with average electricity growth between 1990 and 1998, which was about 2.0 percent per year.  

Assuming normal weather for the upcoming heating season implies (nationally) an increase in heating degree-days (HDD) of about 11 percent above last winter's level, which was well below normal. This winter, total electricity demand is expected to be up by 2.8 percent under normal weather assumptions, driven by increased demand in the residential and commercial sectors, up 4.6% and 3.9%, respectively.  The percentage increases this winter for homes that heat with electricity are expected to be much higher.

In a change from recent history and as a results of high fossil fuel costs this year, we expect winter residential electricity prices to show an increase this winter of about  1% to 2%.  Households that heat with electricity may expect to see increases in heating bills this winter of about 12% due to the combination of increased demand and higher delivered electricity prices.

Winter electric load is expected to increase by about 43 billion kilowatt-hours (bkwh) or about 2.6 percent over last winter’s aggregate level, under normal weather conditions.  Unlike last winter, which also showed high growth due to a booming economy, higher nuclear and excess gas supply do not figure into this year’s electric generators’ fuel supply picture.