# Presentation: 476693

## Summary Short-Term Petroleum and Natural Gas Outlook

**January 10, 2001**
**Energy Information Administration**

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

***Projections***

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

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
Spot WTI prices broke $35 and even $36 per barrel in November as anticipated boosts to world supply from OPEC and other sources did not show up in actual stocks data.  

The recent decline in prices seems to be more the result of an unraveling of speculative pressures than a change in underlying fundamentals.
Prices had been running higher than supply/demand fundamentals would have indicated throughout the fall months as a result of rising Mideast tensions, concern over the adequacy of distillate supplies, and expectations of Iraqi supply interruptions.
But Mideast tensions seemed to ease in December and the market appeared to perceive a quick return of Iraqi crude oil supplies at full capacity.  Pledges by Saudi Arabia/OPEC to offset a longer term Iraqi disruption added to a market sense of oversupply.
Relatively mild weather in Europe has allowed distillate stocks to normalize there and has kept crude demand relatively stable.
All these factors seemed to refocus speculators on the downside potential for price, at least through December.

EIA still sees a very tenuous supply/demand balance.  With low inventories, a severe cold snap in Europe and the U.S. would increase refinery demand for crude, and push prices up.  If the Iraqi disruption is thought to be indefinite, prices could be as high as $3-$5/barrel higher than shown on this graph.  

However, EIA believes the market will move toward a more typical balance during  2001 and that prices will remain around $30 per barrel until the middle of the year, as the match of supply and demand improves.

## Real and Nominal Crude Oil Prices

**Source: Energy Information Administration**

**Notes:**
Despite more than a doubling of average world crude oil prices from 1998 to 2000, prices remain well below the peaks seen in the early 1980’s, both on a nominal and a real (constant dollar) basis.

The average world crude oil price (represented by the average price paid by U.S. refiners for foreign crude oil) in 2000 is estimated by EIA at $27.86 per barrel.  By comparison, the peak annual average world price was $37.05 per barrel in 1981, equivalent to $59.40 per barrel in 1999 dollars.

## OPEC Crude Oil Production 1999-2001

**History**

**Projections**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
 EIA assumes in its base case that OPEC 10 production averages about 0.6 million barrels per day less in the 1st quarter of 2001 than was produced in the 4th quarter of 2000.  This is based on the assumption that beginning in February 2001, OPEC 10 production is 1 million barrels per day less than the estimate for December 2000.

Over the course of the past year, worldwide oil production has increased by about 3.7 million barrels per day to a level of 77.8 million barrels per day in the last months of 2000.

 After being nearly completely curtailed in December 2000, EIA’s base case assumes that Iraqi oil exports only partially return in January.  By February, EIA assumes Iraqi crude oil production reaches 3 million barrels per day, roughly the peak levels reached last year.

 EIA also assumes that after increasing by about 1.2 million barrels per day in 2000, non-OPEC crude oil production increases by about 0.8 million barrels per day in 2001.

 Following relatively small increases of 1.2 million barrels per day each in 1999 and 2000, EIA is estimating world demand may grow by 2.0 million barrels per day in 2001.  Of this increase, about 2/3 comes from non-OECD countries, while U.S. oil demand growth represents more than half of the growth projected in OECD countries.

## Total OECD Oil Stocks*

- *Total includes commercial and government stocks.

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
The most recent data show OECD inventories remaining at very low levels. 

 EIA expects inventories to remain low through the coming year.  This increases the potential for price volatility through the winter, and even extending to the next gasoline season.

Inventories are a good measure of the supply/demand balance that effects prices.  A large over-supply (production greater than demand) will put downward pressure on prices, while under-supply will push prices upward.

As global oil production changed relative to demand, the world moved from a period of over-supply in 1998 to one of under-supply in 1999 and 2000.  

OECD inventories illustrate the changes in the world petroleum balance.  OECD inventories rose to high levels during 1997 and 1998 when production exceeded demand and prices dropped to around $10 per barrel in December 1998.  However, when demand exceeded production in 1999 and early 2000, inventories fell to low levels, and prices rose, reaching almost $35 per barrel on a monthly average basis.

## U.S. Crude Oil Inventory Outlook

**U.S. Crude Oil Inventory Outlook**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
Consistent with OECD inventories, U.S. inventories are low.  They have been well below the normal range for over one year.

Crude oil stocks in the United States, while tending to increase of late toward more normal levels, remain well below average.  As of December 29, crude oil stocks were nearly 289 million barrels, about 4% below the 5-year average.

Near-term tightness in U.S. crude oil markets have kept current prices above forward prices, reflecting current strength in crude oil demand relative to supply.

Relatively strong U.S. oil demand next year should keep crude oil demand high and inventories relatively low, probably through all of next year.  Low inventories raise the risk of price volatility.

## U.S. Distillate Inventory Outlook

**U.S. Distillate Inventory Outlook**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
As of December 29, distillate fuel oil stocks were about 116 million barrels, which is over 14 percent below their 5 year average for this time of year.  Heating oil stocks were at 47.4 million barrels, or about 28 percent lower than their seasonal 5-year average.   

If the currently depressed level of distillate stocks continues, the result could be strong upward pressure on prices for the distillate fuels through the winter.  Recently, the tightness in distillate markets, particularly in the Northeast, has worsened and left the heating oil market more vulnerable to near-term shocks from potential cold weather events or disruptions in the logistical system than was expected earlier this fall.

Unless the second half of the winter in the Northeast is unusually mild or world crude oil prices drop significantly, the current high prices for heating oil and diesel fuel will likely continue until next spring. 

## Distillate Stocks Are Important Part of East Coast Winter Supply

**Source: Energy Information Administration**

**Notes:**
Stocks are normally an important part of East Coast winter distillate supply, since they are the nearest source when anything unexpected occurs, and they supply a significant portion of demand during the peak heating season.  Over the last 10 years, stocks have provided about 15% of supply during the peak winter months of January and February.  On average, stocks supply the East Coast with about 260 thousand barrels per day in January and 280 in February.  Those supplies represent draws of about 8 million barrels in one month.  

In addition, East Coast refineries meet about 25% of demand during January and February, and other regions -- mostly the Gulf Coast -- supply 40-50% of the region’s needs.

Imports generally supply about as much as stocks during the peak months, with most of the product coming from Canada, the Virgin Islands and Venezuela.  During the peak months, product from more distant sources also helps to supply the region.

Thus, about 60% of the East Coast’s supply comes from distant sources, so if cold weather increases demand, re-supply from these distant sources can take several weeks.

## Retail Heating Oil and Diesel Fuel Prices

**Source: Energy Information Administration**

**Notes:**
Because of the higher projected crude oil prices and because of increased tightening in the Northeast heating oil market since the last Outlook, we now expect prices this winter for residential heating oil deliveries to peak at $1.52 per gallon in January.  This is significantly above the monthly peak reached last winter.  Because these figures are monthly averages, we expect some price movements for a few days to be above the values shown on the graph.

This winter’s expected peak price would be the highest on record in nominal terms, eclipsing the high set in February 2000.  However, in real (constant dollar) terms, both of these prices remain well below the peak reached in March 1981, when the average residential heating oil price was $1.29 per gallon, equivalent to over $2.50 per gallon today.

After the current heating season ends, we expect to see a gradual decline in heating oil and diesel fuel prices, reflecting somewhat lower demand and more stable crude oil prices.

## 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***

***717***

***$585***

***$520***

***$760***

***$1,061***

***$/gal***

***$0.92***

***$0.80***

***$1.18***

***$1.48***

***Cost ($)***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Consumer Winter Heating Oil Costs**

**Notes:**
The outlook for heating oil costs this winter, due to high crude oil costs and tight heating oil supplies, breaks down to an expected increase in heating expenditures for a typical oil-heated household of about $300 this winter, the result of a 25% increase in average price and a 11% increase in consumption.  The consumption increase is due to our expectations of normal winter weather this heating season, about 10 percent colder than experienced last year.

Last winter, under less stringent overall conditions than those developing or already in place at this time, Northeast heating oil (and diesel fuel) markets experienced an extremely sharp spike in prices when a severe weather situation developed in late January.  It is virtually impossible to gauge the probability of a similar (or worse) price shock recurring this winter, and, as usual, we have omitted any such development from our base case.  But, compared to almost any previous situation for this time of year, that probability is undoubtedly high.

## U.S. Total Gasoline Inventory Outlook

**U.S. Total Gasoline Inventory Outlook**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
Gasoline inventories in the United States began last summer’s driving season at low levels and ended at low levels.  

In October 2000, with the market focusing on distillate, gasoline inventories slipped well below the normal range.  

As of December 29, gasoline inventories were about 194 million barrels, which is almost 5% below the 5-year average level for this time of year.

EIA’s current forecast is for gasoline markets to remain relatively tight entering the driving season and through next year.  Low inventory levels raise the risk of price volatility, especially in response to regional supply problems.

## Retail Motor Gasoline Prices*

- * Regular self-service

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
Assuming that our base case crude oil price path holds, we project that retail motor gasoline prices will continue to recede this winter, then begin to rise ahead of the summer driving season. By year's end, the monthly average retail price of regular (self-service) motor gasoline is projected to be about $1.38 per gallon.
As was the case with heating oil, last year’s peak average gasoline price, at $1.633 per gallon in June, was the highest ever recorded in nominal terms.  However, in real (constant dollar) prices, the highest observed price was in March 1981, when the average was $1.417 per gallon, equivalent to almost $2.80 per gallon today.

## U.S. Propane Total Stocks

**U.S. Propane Total Stocks**

**Source: Energy Information Administration**

**Notes:**
U.S. inventories of propane benefited from a late pre-season build that pushed inventories to over 65 million barrels by early November 2000, the second highest peak pre-heating season level since 1986. 

U.S. inventories of propane are expected to remain within the normal range for the duration of the 2000-01 heating season despite concerns that continued severe weather could put significant strains on inventories.         

## Source: Reuters and Oil Price Information Service 

**Average Weekly Propane Spot Prices**

**Notes:**
Propane spot prices at the major trading hubs remained relatively close through the fall of 2000, even as they were pushed higher by rapidly rising natural gas prices. 

Prices in the entire country experienced a rapid runup in December as demand increased (due to unusually cold weather) and supply was constrained (due to refiners using propane in their own facilities and natural gas processing plants offering less propane for sale as natural gas prices remained extraordinarily high).

Residential propane prices are expected to rise over the remainder of the 2000-01 heating season as continued volatility in crude oil markets and strong heating demand put upward pressure on propane prices during this period.

## Current Natural Gas Spot Prices: Well Above the Recent Price Range

**Notes:**
The surge in spot prices at the Henry Hub since April are well above a typical range for 1998-1999  (in this context, defined as the average,  +/- 2 standard deviations) 

The upper bound on the typical range for 1998-99 is less than one-third of recent spot prices.

The Henry Hub spot price recently spiked at $10.53 per MMBtu on Friday 12/29.

Reasons for the price run-up include:
relatively flat natural gas production for several years
increased demand for natural gas as the economy has grown, especially from the electricity generating sector
expectations for a colder winter than experienced in the last few years (generally borne out so far this heating season)
low levels of natural gas in storage
high prices for oil limiting the economic incentive to switch to petroleum-based fuels

## Natural Gas Spot Prices:

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

**Sources: History: Natural Gas Week;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**

We expect to see peak monthly spot wellhead prices this winter of over  $8.40, the monthly average reported for December 2000.  Recently, concern about cold weather and low stocks pushed daily spot gas prices over $10.50  per mcf.  However, in early January of this year, forecasts of warm weather pushed the price down by more $1.00 per mcf in one day, indicating the extraordinary volatility in the current U.S. market.

The gas storage situation in the United States has not improved over the last few months, a sign that demand remains strong.  We believe that the 30-year records for (seasonally adjusted) storage lows may be challenged throughout the heating season.

##                   Working Gas in Storage (Percentage Difference from Previous 5-Year Average)

**                  ****Working Gas in Storage**** ****(Percentage Difference from Previous 5-Year Average)**

## Rigs Drilling Gas Wells Are At All-Time Highs

**Notes:**
Rigs drilling for gas wells hit a weekly low point of 362 in mid April 1999.

Gas rigs in operation have more than doubled since then, hitting a record of     879 as of December 29, 2000.

The increasing number of resulting gas well completions have been expanding production in major producing States, such as Texas.  We see some signs of improved production capability already in the US.  Texas has expanded 1.2% through the first 9 months of 2000.  Wyoming, the third largest producing State (by volume), has increased production by more than 10% during the first 8 months of 2000.  However, these increased volumes are small relative to the increased demand we have experienced over the last year.

## Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**
Mild weather minimized residential gas consumption over most of the past 3 winters.  Our projections for more or less normal winter weather this year mean about 11 percent greater demand this winter compared to last year.

The combination of higher consumer prices and demand increases expected under normal weather suggests an increase in gas home heating costs  of about 50-70 percent this winter.  Our projections imply natural gas customers would be expected to pay over $380 more this winter for heat than last year.