# Presentation: 798707

## CSG/ERC 44th Annual MeetingSpringfield, MA

**Douglas MacIntyre, Senior Oil Market Analyst**
**Petroleum Division**
**U.S. Energy Information Administration**
**August 10, 2004**

**Northeast Energy Outlook Panel**

## WTI Crude Oil Price: Potential for Volatility Around Base Case

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004. **

## Crude Oil Price, OECD Days Supply, and World Excess Production Capacity 

- Crude Oil Price, OECD Days Supply, and World Excess Production Capacity

## OECD Commercial Oil Inventories

**Source:  History:  *****Oil Market Report*****, IEA, July 2004**

## Will OPEC Keep Markets Adequately Supplied?

**History**

**Projections**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

## Annual World Oil Demand Growth1993-2005

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
World oil demand growth appears to be rebounding in 2002. Demand growth was negative in 2001, due in part to the September 11 terrorist attacks in the U.S. and a weakened world economy. However, EIA estimates that 2002 demand growth will hit about 0.3 percent, with demand continuing to grow by over 1.2 percent in 2003.

## Annual World Oil Demand Growthby Region, 1993-2005

*** Other includes Australia, New Zealand, the Middle East, and Africa.**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
  Following relatively small increases of 1.3 million barrels per day in 1999 and 0.8 million barrels per day in 2000, EIA is estimating world demand may grow by 1.5 million barrels per day in 2001.  Of this increase, nearly 2/3 comes from non-OECD countries, while U.S. oil demand growth represents about 40% of the growth projected in OECD countries.  Still, a slowing world economy could moderate world demand growth further than shown.

 Demand in Asia grew steadily during most of the 1990s, with 1991-1997 average growth per year at just above 0.8 million barrels per day.  However, in 1998, demand dropped by 0.3 million barrels per day as a result of the Asian economic crisis that year. Since 1998, annual growth in oil demand has rebounded, but has not yet reached the average growth seen during 1991-1997.

 In the Former Soviet Union, oil demand plummeted during most of the 1990s, with demand decreasing yearly by an average of 0.6 million barrels per day during 1991-1997. In the past few years, demand seems to have flattened, and 2001 is expected to continue this recent trend.

 Demand growth in Europe averaged 0.2 - 0.3 million barrels per day from 1991 through 1998.  However, oil demand growth dipped significantly in 1999 before showing a slight increase in 2000.  Oil demand in Europe is expected to grow in 2001 by an amount similar to that seen in the early to mid-1990s. 

 In the Americas, oil demand growth has continued to be strong throughout almost all of the last decade.  While there was little growth in 2000, oil demand in the Americas is expected to exhibit strong growth in 2001.

## U.S. Crude Inventories Projected to Remain in Normal Range

**Sources: EIA, Short-Term Energy Outlook, July 2004**

**History**

**Million Barrels**

**Notes:**
U.S. crude oil stocks have flirted with their lower operational inventory level since last fall.

EIA’s current forecast shows them returning near the bottom of the normal seasonal band by the end of this year, then tracking on the lower edge through 2004.

## U.S. Net Crude Oil Imports

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

## U.S. Crude Oil Refinery Inputs

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

## Distillate Prices Generally Follow Crude Oil

**Spot West Texas Intermediate**

**East Coast Retail On-Highway Diesel Fuel**

**East Coast Residential Heating Oil**

## East Coast Distillate Stocks

**Source: Energy Information Administration**

**2002-03**

**2001-02**

**2003-04**

## Distillate Winter Demand Expected to Continue to Grow

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
Demand was one of the factors keeping inventories low this past winter.  Normally, demand peaks in January.  

Distillate demand during the winter of 1998-99 was relatively low  as weather was fairly warm.  Diesel demand growth was the main contributor to total distillate demand growth during the winter of 1999-00 since weather again was relatively warm.
In December 1999, when stocks dropped below the normal band, demand was almost 12% stronger than the prior year, although U.S. temperatures were only 6% colder.  
Some of this strength may have come from Y2K activities.  For example, anecdotal evidence indicates some utilities removed themselves from the natural gas system and used distillate during the year turnover to assure uninterrupted electricity supply.  

Demand is expected to increase 4.3% this winter over last.  Weather will likely average about 10% colder this year over last in the Northeast, contributing to the higher demand.  But distillate demand has been boosted by very high natural gas prices, which caused some large consumers to switch from gas to distillate fuels. 

## Last Winter’s Weather Was Close to Average

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
The first possible cause for higher winter distillate demand would undoubtedly be the weather.

But as this chart shows, on a national basis, last winter’s temperatures were statistically near normal, in fact slightly warmer.

In New England, average temperatures for the winter were slightly colder than normal, but not by much.

What else could account for the surge in demand?

## Distillate Production Higher Leading Up to Peak Demand Season

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

## Distillate Imports Expected to be Key Component In Winter Supply

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

## Distillate Stocks Expected to be in Normal Range

- Distillate Stocks Expected to be in Normal Range

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Actual**

**Forecast**

## Northeast Heating Oil Inventories

**Monthly**

**Source: Energy Information Administration.**

**Weekly**

## Consumer Prices and Expenditures – Heating Oil (Northeast)

|  | 2001-2002 | 2002-2003 | 2003-2004 | 2004-2005 |
| --- | --- | --- | --- | --- |
|  | Actual | Actual
 | Actual
 | Forecast (est.) |
| Consumption (gals.) | 577 | 743 | 728 | 693 |
| Average Price | $1.10 | $1.34 | $1.36 | $1.56 |
| Expenditures | $635 | $993 | $991 | $1,080 |

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
This chart shows the “bottom line” for heating oil consumers.

(Remember that this is a very preliminary forecast for prices, and that this  consumption level assumes normal temperatures.)

Both prices and consumption would be slightly lower than last year, yielding a modest reduction in expenditures for consumers.

These numbers will undoubtedly change somewhat by the time we release our Winter Fuels Outlook in October.

## Propane Prices Follow Crude Oil and Natural Gas

**Notes:**
Though we usually look at propane prices in relation to crude oil, they are also influenced by natural gas prices, especially when gas prices are unusually high.

For whatever reason, probably because of the difference in units as much as anything, analysts seem to have a hard time understanding the relationship between the prices of propane, crude oil, and natural gas.

## U.S. Propane Stocks

**  ****Average Range**

**Lower Operational Inventory = 18.5 Million Barrels**

**Actual**

**Forecast**

**Source: Energy Information Administration**

**Notes:**
Based on 5-year monthly build/draw averages, U.S. inventories of propane would be expected to begin the 2003-04 heating season at an estimated 63 million barrels.

From this point, based on 5-year monthly build/draw averages, U.S. inventories of propane would fall to about 26 million barrels by the end of the heating season.    

## Consumer Prices and Expenditures – Propane (Midwest)

|  | 2001-2002 | 2002-2003 | 2003-2004 | 2004-2005 |
| --- | --- | --- | --- | --- |
|  | Actual | Actual
 | Actual
 | Forecast (est.) |
| Consumption (gals.) | 803 | 941 | 888 | 919 |
| Average Price | $1.11 | $1.20 | $1.30 | $1.41 |
| Expenditures | $888 | $1,125 | $1,156 | $1,298 |

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
As with heating oil, the bottom line to the winter outlook for propane is consumer expenditures.

Again, a presumed return to “normal” winter weather implies a slight decrease in consumption.

Propane prices, influenced by natural gas, are currently expected to be about the same as last winter.

The net result is a small decrease in consumer expenditures.

## U.S. Natural Gas Spot Prices                                                                     (Base Case and 95% Confidence Interval*)

**Sources: History: Natural Gas Week;  Projections: Short-Term Energy Outlook, July 2004.**

**The confidence intervals show  +/- 2 standard errors based on the properties of the model.  The ranges do not include the effects of major supply disruptions.*

## U.S. Working Gas in Storage(Difference from Previous 5-Year Average)

**EIA, Short-Term Energy Outlook, July 2004**

## Consumer Prices and Expenditures – Natural Gas (Midwest)

|  | 2001-2002 | 2002-2003 | 2003-2004 | 2004-2005 |
| --- | --- | --- | --- | --- |
|  | Actual | Actual
 | Actual
 | Forecast (est.) |
| Consumption (mcf) | 81.3 | 95.2 | 89.9 | 93.0 |
| Average Price | $7.41 | $8.40 | $9.69 | $10.56 |
| Expenditures | $602 | $800 | $871 | $983 |

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
As with heating oil, the bottom line to the winter outlook for propane is consumer expenditures.

Again, a presumed return to “normal” winter weather implies a slight decrease in consumption.

Propane prices, influenced by natural gas, are currently expected to be about the same as last winter.

The net result is a small decrease in consumer expenditures.

## Crude Oil andGasoline Price Outlook 

**Regular Gasoline**

**Wholesale**
**Gasoline**

**Crude Oil **
**(WTI)**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, July 2004.**

**Notes:**
Crude oil prices rose once again to very high levels in January 2004, peaking at $36 per barrel, even surpassing those seen last year when markets were impacted by the disruption in oil production from Venezuela and supply concerns ahead of the conflict with Iraq.  By the end of January, crude prices had dropped some, but remain high, closing at about $32.50 per barrel as of February 6, 2004.  Crude oil prices are expected to drop further as winter pressures recede, but remain close to $30 per barrel throughout 2004.

## U.S. Average Retail Regular Gasoline Prices 

**Source: EIA Weekly Retail Gasoline Price Survey.**

**Notes:**
 Retail gasoline prices in January averaged $1.57 per gallon, but hit a record high for January of $1.62, partly as a result of high crude oil prices.   With potentially slightly lower crude oil prices countering seasonal price increases, we might see retail prices peak this summer at 5-10 cents over January levels, assuming no supply disruptions and price spikes.

 Tightening conditions in gasoline markets in January also contributed to higher prices, as reflected in spot prices.  Gasoline price cracks (gasoline spot price minus crude oil price) are high for this time of year (17 cents per gallon for Gulf Coast regular compared to 7 cents 5-year average).  In summary: high seasonal demand (economic recovery), low imports (tight international supplies and changing U.S. product specifications), along with tight crude oil markets that limit feedstock flexibility, are all contributing to gasoline price pressure.  This situation could likely continue into the spring, as low crude oil stocks limits the amount refiners can increase gasoline production through increasing refinery inputs.  In addition, new gasoline specifications may make it more difficult for some foreign refiners to export gasoline to the U.S. market.

  Conditions, both current and expected, for this spring/summer appear similar to those seen in 3 out of the last 4 years.  High and potentially volatile prices are a significant risk.

## Gasoline Imports Mainly Serve PADD 1

_***PADD 1 Sources of Supply***_

**877 MB/D (2003)**

**Source: EIA, Petroleum Supply Monthly**

**About 25% of PADD 1’s supply comes from imports.**
**Canada, Virgin Islands, Venezuela, Western Europe are important sources of import volumes.**

**Gasoline Imports Mainly Serve PADD 1**