# Presentation: 171033

## Winter 2003-2004 Fuels Outlook

**Presented by****Guy Caruso****EIA Administrator**

***2003 NASEO/EIA Winter Fuels Outlook Conference***
***        ******October 7, 2003***

**Winter 2003-2004 Fuels Outlook**

**Notes:**
I will open my presentation with the conclusion and then go through the details surrounding these projections of energy consumption and prices.

## Household Winter Heating Fuel Summary

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Household Winter Heating Fuel Summary**

***Base case demand lower; expenditure changes mixed.***

**Notes:**
Under normal weather conditions, fuel supplies are expected to be sufficient to avoid a prolonged major heating fuel price spike this winter.  However, oil and gas spot prices remain relatively high and vulnerable to unexpected supply disruptions.

Expenditures for a typical household using natural gas are expected to increase by about 5%; expenditures for a propane-consuming household are expected to fall 2%-3%;. expenditures for a household using heating oil are projected to decline 8%. 

Despite lower expected consumption of heating fuels, natural gas consumers can expect to see slightly higher heating bills even under normal weather conditions as a result of higher delivered prices.  Heating-oil and propane customers, however, can expect a slight decline in their bills, reflecting lower demand and prices near last winter’s levels at $1.33 per gallon for heating oil and $1.21 per gallon for propane.

The combination of high natural gas prices, weather, and a weak industrial economy contributed to reduced demand by electric power generators and industrial customers.  As a result, natural gas injections during the summer, which were at a record pace, enabled beginning-of-season stocks to reach normal levels.

Please note that these expenditures are calculated using national average prices and regional consumption averages and therefore are best used to determine changes from winter to winter.   These expenditures vary from region to region as well as from household to household.

## Economic Growth Assumptions for the Forecast

**Economic Growth Assumptions for the Forecast**

***Solid economic recovery projected for 2004***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
The economy has grown since late 2001 and that growth is projected to accelerate during the the forecast interval.  Real GDP is expected to grow by 4.1% in 2004 compared to 2.6% in 2003.  Real disposable income has remained surprisingly strong, especially in 2002, during which reductions in income tax rates were implemented.

Manufacturing output, which is more cyclical than the more broad-based GDP and disposable income measures, declined in 2002 and is expected to register a further, but smaller, decline in 2003.  It is poised to stage a strong recovery in 2004.

## Heating Demand Indicators:Probability Ranges for Degree-Days* This Winter

**Gas-weighted heating degree-days*

**Heating Demand Indicators:****Probability Ranges for Degree-Days* This Winter**

***Winter weather was colder than normal last year.***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
95 percent of all winters will tend to fall within the high and low values shown on this chart.   

In the base case forecast, we assume normal weather (dark center line).

Because last winter was colder than normal, weather (in terms of heating degree-days) this winter is expected to be warmer, reducing demand for all space-heating fuels, especially during the peak months of January and February.     

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

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

***Average winter WTI prices, while high, lower than last year.***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Prospects for incremental increases in world oil production, especially in the Former Soviet Union and Iraq, prompted OPEC to reduce production quotas by 900,000 barrels per day to prevent prices from falling sharply.  Nonetheless, average crude oil prices during the winter (at $29.70 per barrel for WTI)  are still expected to be slightly below last winter’s average. 

In addition, growth in world oil demand (for consumption and stock building) this winter (and for 2004 as a whole) is likely to absorb much of the additional supply from Iraq and the Former Soviet Union, which would tend to prevent anything more than modest declines in crude oil prices in 2004. 

This is our baseline assessment, but, as usual, we acknowledge the wide range of uncertainty (due to weather, OPEC actions, and general economic conditions) in oil prices as illustrated above.

## Annual World Oil Demand Growth 1997-2004

***World oil demand growth to continue recovery from 2002 lows in 2004***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
The projected recovery of the U.S. and world economy in late 2003 and 2004 is expected to result in continued growth in world oil demand despite an expected lack of weather-driven demand increases. About a third of the 1.05 million barrels per day growth in world oil demand in 2004 is projected to come from higher U.S. demand.

Global oil demand growth this winter is likely to be somewhat muted compared to last year (particularly in the United States) if weather is normal or warmer than normal.

## OPEC Crude Oil Production and Capacity

***OPEC***** *****10: balancing the return of Iraqi production***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
OPEC’s decision to cut OPEC 10 quotas by 900,000 barrels per day beginning in November is likely to keep total OPEC production lower than otherwise by about 500,000-600,000 barrels per day.

OPEC 10 production in September is estimated to have been 25.6 million barrels per day, about the same as August and only 0.2 million barrels per day  above quota levels. 

The Outlook focuses on total OPEC oil production. If Iraq does not meet the production targets set by the Iraqi oil ministry, it is assumed that the OPEC 10 will adjust their production accordingly to compensate.

## OECD Commercial Oil Stocks

**OECD Commercial Oil Stocks**

***OECD oil stocks to rise to more normal levels in 2004***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
OECD commercial oil stocks, which all year have stood near or below the minimum levels seen over the previous 5 years, are expected to recover toward more normal levels in 2004 even taking the recently announced OPEC cutbacks into account.

However, the additional pressure on spot oil markets from storage-related demand to reach more normal levels should help keep prices from falling precipitously in 2004.

## U.S. Commercial Crude Oil Stocks

**U.S. Commercial Crude Oil Stocks**

***US crude oil stocks likely to remain tight this winter***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
After beginning the year at depressed levels, U.S. crude oil inventories have recovered to the lower end of the 5-year min/max range and are expected to increase to somewhat more normal levels in 2004.  For the winter, however, crude oil supplies in the United States are expected to remain very tight.

## U.S. Petroleum Demand Growth by Fuel

**U.S. Petroleum Demand Growth by Fuel**

***2004 to see recovery in petroleum products demand***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

** ****0.6%**

**0.9%**

**2.1%**

**Notes:**
For 2003 as a whole, total domestic petroleum demand is projected to average 19.9 million barrels per day, an increase of only 170,000-180,000 barrels per day, or 0.9 percent, from 2003.   That relatively small increase, despite the sizable boost in space-heating demand and high natural gas prices, reflects a weakness in the economy and continued retrenchment in the airline industry as that sector endeavors to save fuel by increasing load factors.   

In 2004, total petroleum demand growth is projected to climb by 420,000 barrels per day, or 2.1 percent, to 20.35 million barrels per day.   Recoveries in motor gasoline, jet fuel, diesel and petrochemical markets more than offset weather-related declines. 

## Winter Distillate Demand Should About Be the Same as Last Winter If Weather Is Normal

***No winter growth in distillate demand expected***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Although distillate fuel demand growth for all of 2003 is expected to look strong (up 3.7% from 2002 levels), this is largely due to harsh weather in the Northeast.  Even if high natural gas prices continue to favor oil consumption, total distillate demand for all of 2004 is expected to increase by only 1.9 percent as a result of the year-to-year shift in weather patterns.

For the winter as a whole, heating degree-days in the Northeast region (Mid Atlantic and New England Census Divisions) would be about 8 percent below last winter if normal weather prevails.  With normal weather, we therefore expect to see little or no winter growth in distillate demand compared to the 2002-2003 winter.   In Q1, demand is projected to decline by about 1 percent due to last winter’s cold snap, which boosted demand at that time.

## U.S. Total Distillate Fuel Inventories

**U.S. Total Distillate Fuel Inventories**

***US distillate fuel stocks near middle of 5-year average (for now)***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
At the end of September, distillate fuel oil inventories were about 132 million barrels, close to the middle of the 5-year minimum/maximum range.  Stocks should end the winter with about 105 million barrels, if weather patterns turn out to be normal. 

Nonetheless, distillate fuel (including heating oil) markets may be vulnerable to upward price shocks this winter if weather is colder than normal.   This would reduce stocks to levels similar to those observed at the end of last winter, when those stocks ended up at the lower bound of the minimum/maximum range.

Although total distillate stocks are about average now, this is not true for heating oil stocks, which are about 8 million barrels (13 percent) below the previous 5-year average including 4 million barrels (10%)  below the average in PADD 1 (East Coast).

## Distillate Fuel Oil Imports Likely to Be Lower This Winter

***Distillate imports dependent on weather-related demand***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Imports of distillate fuel are an important source of supply in the winter, and generally peak in January and February, the heart of the winter season.  The more than 700,000 barrels per day of net imports in January 2001 is the largest on record.  The following year (2002), when winter weather was very mild, net imports during the first quarter averaged only 113,000 barrels per day.  But the return of  cold weather during the first quarter this year resulted in 290,000 barrels per day of net imports.  Assuming a normal winter during the first quarter of 2004, net imports are expected to average about only 240,000 barrels per day.  

## Distillate Fuel Price Outlook

**Distillate Fuel Price Outlook**

***Heating oil winter price to average to match last winter***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
After rising earlier in the year, both retail diesel fuel and heating oil prices have declined.   For the winter we expect average heating oil prices to be $1.33 per gallon, about the same as last year.  These prices are relatively high in historical terms, at least on a nominal basis.

The expectation of somewhat lower crude oil prices are expected to generate declines of 8-9 cents per gallon for both diesel fuel and retail heating oil at the retail level for all of next year. 

## U.S. Natural Gas Spot Price Outlook

**U.S. Natural Gas Spot Price Outlook**

***Winter wellhead prices: still high but slightly below last winter on average.***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Now turning to natural gas:

Monthly spot wellhead prices have remained well over $4.50 per thousand cubic feet since last winter, during which those prices spiked above $7. Closer to normal summer weather than last year, plus the displacement of natural gas demand from the persistently high prices, enabled natural gas suppliers to replenish inventories at a record pace to 2.84 Tcf by the end of September. But the prices (actual and projected) at twice their winter 2001-02 lows of $2.25 per mcf reflects the strain on supply resulting from the expansion of the domestic demand base resulting from the sizable recent increase in gas-fired electric generation capacity as well as limited new production capability in North America.

This winter, we expect to see natural gas wellhead prices averaging  about $4.30 per thousand cubic feet, or about $0.30 per thousand cubic feet less than last winter’s average. For all of 2003, the annual average natural gas wellhead price is projected to be about $4.90 per thousand cubic feet compared to just under $3.00 in 2002.  Next year, wellhead prices are projected to decline by about $0.9 per thousand cubic feet over the 2003 average price to about $4.00. The assumption of normal weather this winter translates into a scenario that is 3 percent warmer than last winter nationally, (about 8 percent warmer in the Northeast). 

## U.S. Natural Gas Demand Growth Patterns

**U.S. Natural Gas Demand Growth Patterns**

***Natural gas demand falls by 1.1 percent in 2003, growth minimal next year***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Natural gas demand is expected to have weakened by 1.1 percent for all of 2003 despite the colder-than-normal first quarter.  The main reasons for the decline are:  firm prices, which caused electric power generators and industrial customers to switch to other fuels or otherwise reduce gas use; increased hydroelectric generation; and weakness in industrial production.  

In 2004, natural gas demand is expected to increase once again, but by only 0.6 percent.  The small increase is due in part to:  the assumption of normal weather; continued declines in electric power demand resulting from increased hydroelectric and nuclear power generation.

During the winter months, natural gas demand is projected to decline by 2.4 percent from that of last winter, largely as a result of year-to-year changes in the weather.  

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

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

***Natural gas stocks: Back to normal, for now.***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Working natural gas in storage is estimated to have reached about 2.84 trillion cubic feet (tcf) by the end of September, similar to the 5-year average. 

Storage levels are now about 200 bcf lower than a year ago, but the projected winter-season drawdown (assuming normal weather) is expected to be less than that of the previous winter season, enabling those stocks to remain close to historical averages.  This contrasts with the experience last winter, when stocks reached record lows. 

Storage is therefore expected to remain close to average levels--at least through the beginning of the next heating season– if winter weather is about normal.

## U.S. Natural Gas-Directed Drilling Activity

**U.S. Natural Gas-Directed Drilling Activity**

***Natural gas drilling recovers in 2003.***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Natural gas-directed drilling, which declined sharply from mid 2001 into 2002, staged a recovery during much of 2003.

Baker Hughes reported average active rigs drilling for natural gas in September at about 940, an historically high level but well short of the peak of 1,058 seen in July 2001.  The drilling strength, which reflects the firmness in natural gas prices at $4.50 to $5.00 per mcf is likely to wane a bit in 2004.

## U.S. Electricity Demand Growth Patterns

**U.S. Electricity Demand Growth Patterns**

***Electricity demand weak in 2003, picks up slightly in 2004***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
In 2003, total electricity demand (retail sales plus industrial and commercial generation for own use and other direct sales) is expected to increase 0.2 percent, due primarily to no growth in commercial demand and weak industrial demand.  

In 2004, total electricity demand is projected to grow once again, but by only 0.7 percent, far below historical average growth rates.  Residential demand is expected to slow due to the assumptions of normal weather and industrial demand is projected to remain relatively weak. Commercial demand growth, however, is projected to accelerate. 

## Weather Impacts by Heating Fuel

**Weather Impacts by Heating Fuel**

***Severe weather = +16% to +19% cost increase for heating***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Based on winter-season (October-March) data on heating degree-days from 1975 to 2001, we estimate that the nation faces a 13.2-percent chance that this winter’s total heating degree-days will be either 10 percent above or below the normal range.   In other words, there is a 6.6-percent chance that a winter would be at least 10 percent colder than normal. 

A winter that is 10 percent colder throughout the season is assumed to result in an additional 10 percent in heating-related demand across fuels.  A unit elasticity for the heating component of fuel demand with respect to heating degree-days conforms well with analytical estimates across fuels. 

Residential natural gas prices, in a cold weather scenario, would average $9.67 per mcf, 5-6 percent above the base case average.  As a result, the average residential cost of heating would be about 16 percent above that of the base case and 22 percent above the average cost of the preceding winter.  

Retail heating oil prices, in a cold weather scenario, would average $1.42 per gallon, 6 percent above the base case average.  As a result, the average residential cost of heating would be about 17 percent above that of the base case and 7 percent above the average cost of the preceding winter.  

Residential propane prices, in a similar scenario, would average $1.30 per gallon, 8 percent above the base case average.  As a result, the average residential cost of heating would be about 19 percent above that of the base case and 16 percent above the average cost of the preceding winter.  

For all fuels, prices may be vulnerable to much higher price spikes than depicted here in the event of very cold weather.  The sensitivity of prices to demand surges at increasingly low inventory levels is very difficult to predict.

## U.S. Working Gas in Storage Cases

**U.S. Working Gas in Storage Cases**

***Natural gas stocks are within historical ranges following record builds***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Natural gas inventories are within historical ranges, following several months of high inventory accumulation.  A very cold weather scenario this winter will be likely to move inventories close to last year’s record low of 739 bcf, and yield sharply higher spot gas prices.

## U.S. Total Distillate Fuel Inventory Cases

**U.S. Total Distillate Fuel Inventory Cases**

***If cold winter, stocks could drop below historical range***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
The base case trajectory for distillate inventories lies within the recent historical range. A colder-than-normal scenario leaves distillate (including heating fuel) markets at the lower end of the range, similar to that which occurred last winter, resulting in upward price pressures.

If cold temperatures prevail across the northern hemisphere this fall and winter, incremental supplies of distillate fuel may come at high marginal cost.

The level of distillate inventories over the next 4-6 weeks will be a particularly important indicator of heating oil supply adequacy this winter. 

## U.S. Total Propane Inventory Cases

**U.S. Total Propane Inventory Cases**

***Propane stocks are within the historical range***

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, October 2003.**

**Notes:**
Similar to the situation for natural gas, beginning-of-season propane inventories are within the recent historical range.  The expected stock drawdown would leave end-of-season stocks also within historical norms and above those of last winter.

Very cold temperatures would tend to push propane inventories below the minimum of the recent historical range, especially if LPG production is curtailed by resultant run-ups in natural gas prices.

## Summary

*** ******Recent trends in oil and gas markets are positive*****              ****	****but markets remain vulnerable to surprises in supply and ****	****demand this winter.**
***Net changes in residential heating expenditures this winter:******                    ******	*****- minus 8 percent for heating oil;**
**- plus 5 percent for natural gas; **
**- plus 2 percent for electricity; **
**- minus 3 percent for propane.**
***Uncertainties:***
***	*****- Weather**
**	****- Pace, timing magnitude of resumption in Iraqi exports**
**	****- OPEC production decisions**
**	****- Unexpected supply disruptions**