Washington, 8 December 2009 

Highlights:  EIA expects the price of West Texas Intermediate (WTI) crude oil will average about $76 per barrel this winter (October-March).  The forecast for the monthly average WTI price dips to $75 early next year then rises to $82 per barrel by December 2010, assuming U.S. and world economic conditions continue to improve.  EIA’s forecast assumes that U.S. real gross domestic product (GDP) grows by 1.9 percent in 2010 and world oil-consumption-weighted real GDP grows by 2.6 percent. 

• Rising crude oil prices contribute to an increase in the annual average regular-grade gasoline retail price from $2.35 per gallon in 2009 to $2.83 in 2010, as pump prices approach $3 per gallon during next year's driving season.  Projected annual average diesel fuel retail prices are $2.46 and $2.96 per gallon, respectively, in 2009 and 2010.  Average household expenditures on heating oil this winter are expected to increase to $1,911 from $1,864 last winter.  Projected average household expenditures for propane of $1,700 this winter are almost 13 percent lower than last winter’s $1,950.

• EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $4.62 per thousand cubic feet (Mcf).  This represents a $0.67-per-Mcf increase from the estimated 2009 price of $3.95 per Mcf.  Natural gas working inventories reached a new record-high level of 3.837 trillion cubic feet (Tcf) on November 27 as mild weather throughout much of the country contributed to uncommon storage builds for most of that month.  Projected average household expenditures on natural gas total $778 this winter, compared with $889 last winter.

Global Crude Oil and Liquid Fuels

Global Petroleum Overview.  As 2009 draws to a close and the Organization of the Petroleum Exporting Countries (OPEC) prepares to meet again at the end of the month, it faces a global oil market that has firmed up in response to production cuts that began to take effect in January 2009. Although OPEC compliance with the cuts has weakened and global oil inventories remain very high by historical standards, WTI oil prices averaged $78 per barrel in November, continuing their generally upward trend since February.  Expectations of a continued global economic turnaround have buttressed oil markets, and this Outlook assumes world oil-consumption-weighted real GDP grows by 2.6 percent in 2010, following a decline of 0.7 percent in 2009.  EIA’s expectation is that OPEC crude oil output in 2010 will hold at roughly fourth-quarter 2009 levels of under 30 million barrels per day.

Global Petroleum Consumption.  EIA forecasts that world oil consumption will grow in 2010 by 1.1 million barrels per day ( bbl/d) to 85.2 million bbl/d, down slightly from last month’s Outlook.  Countries outside of the Organization for Economic Cooperation and Development (OECD) are likely to account for almost all of this growth. Projected OECD oil consumption grows by only 0.1 million bbl/d in 2010, despite a projected 0.27 million bbl/d increase in the United States after a very weak 2009.

Non-OPEC Supply.  EIA expects non-OPEC oil production to average 50.3 million bbl/d in 2009, about 0.6 million bbl/d higher than year-earlier levels.  Non-OPEC oil production increases have been largely the result of higher production from the United States, Brazil, and the Former Soviet Union (FSU). Oil production in Colombia has also been surprisingly strong.  According to preliminary data, the country’s crude oil output exceeded 0.7 million bbl/d in October for the first time since 2000.  Projected non-OPEC supply growth slows to 0.2 million bbl/d in 2010, largely the result of lower growth in the United States and FSU.

OPEC Supply.  OPEC crude oil production is expected to average 29.1 million bbl/d in 2009, down more than 2 million bbl/d from year-earlier levels.  Projected OPEC crude oil production increases to an average of 29.6 million bbl/d in 2010, a response to an anticipated rebound in global oil demand.  EIA expects OPEC non-crude petroleum liquids, which are not subject to OPEC production targets, to grow by 0.6 million bbl/d in 2010. OPEC is scheduled to meet in Angola on December 22 to reassess the market situation.  Through the forecast period, OPEC surplus crude oil production capacity should remain in excess of 4 million bbl/d, versus an average of 2.8 million bbl/d seen over the 1998-2008 period. 

OECD Petroleum Inventories.  OECD commercial oil inventories stood at 2.77 billion barrels at the end of the third quarter of 2009, 115 million barrels more than the 5-year average.  Inventories are projected to be at 58 days of forward cover at the end of 2009, 5 days above the 5-year average for that time of year.  EIA expects OECD oil inventories to remain above average historical levels throughout the forecast period.

Crude Oil Prices.  WTI crude oil spot prices averaged $78 per barrel in November, more than $2 per barrel above than the prior month’s average.  This increase reflected improving expectations of a global economic recovery and higher oil consumption offsetting concerns about the high current level of oil inventories.  EIA forecasts that WTI spot prices will weaken over the next few months, falling to about $75 per barrel in February, and then rising to about $82 per barrel by the end of next year.

Crude oil prices were less volatile in November than during October.  During November, the WTI spot price traded within a $5-per-barrel range, between roughly $75 and $80 per barrel.  This contrasts with October, when the WTI spot price averaged just under $76 per barrel and traded in an $11-per-barrel range, between roughly $70 and $81 per barrel.

In the crude oil futures options market, WTI implied volatility trended lower over the second half of October and most of November 2009, following the downtrend in spot price volatility.  Implied volatility from the February 2010 futures options contracts averaged 40 percent for the 5 days ending December 3, with the lower and upper limits of the 95-percent confidence interval for the February 2010 futures price at about $60 per barrel and $112 per barrel respectively.  The February 2010 WTI futures contract averaged $78.43 per barrel for the 5 days ending December 3.

Last year at this time, market participants were pricing WTI crude oil in February 2009 at $50 per barrel, about $28 below the level currently trading for February 2010 delivery.  The implied volatility last year for the February 2009 contract was double the current level, at 82 percent per year, with lower and upper limits of $29 and $84 per barrel, respectively, for the 95-percent confidence interval.  The higher implied volatility reflected continued market uncertainty following a price collapse from all-time highs for the WTI futures of more than $145 per barrel in July 2008.

U.S. Crude Oil and Liquid Fuels 

U.S. Petroleum Consumption.  Total consumption of liquid fuels and other petroleum products is projected to average 18.7 million bbl/d, or about 800,000 bbl/d (4.1 percent) lower in 2009 compared with 2008.  During the first half of 2009, total consumption fell by almost 1.25 million bbl/d (6.3 percent) from the same period last year, one of the steepest declines on record.  The year-over-year projected decline in petroleum consumption slowed to 280,000 bbl/d (1.5 percent) in the third quarter 2009, although this is in large part due to a 220,000-bbl/d increase in motor gasoline consumption as high prices and Hurricanes Gustav and Ike depressed gasoline consumption last year.  Year-over-year total petroleum consumption is 430,000 bbl/d (2.2 percent) lower in the fourth quarter of 2009 as the gains in gasoline consumption return to near zero and warmer weather in the eastern United States reduces heating fuel demand.  The modest economic recovery assumed for 2010 partly contributes to an increase in total liquid fuels consumption of 270,000 bbl/d (1.4 percent). 

U.S. Petroleum Supply.  EIA expects U.S. crude oil production will average 5.34 million bbl/d in 2009, the first production increase since 1991.  Production is forecast to increase to an average of 5.44 million bbl/d in 2010.  The growth in production comes primarily from the Federal Offshore Gulf of Mexico.  Crude oil production from the Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields is expected to account for 12 percent of total U.S. crude oil production by the fourth quarter of 2010. 

U.S. Petroleum Product Prices.  Regular grade motor gasoline prices are expected to average $2.65 per gallon in December, unchanged from the November average but almost $1 per gallon higher than last December.   In 2010 the refiner cost for crude oil averages about $77 per barrel, or over $17 per barrel (41 cents per gallon) higher than the 2009 average, contributing to an expected $0.48-per-gallon increase in regular-grade gasoline prices to an average of $2.83 per gallon next year.  Diesel fuel retail prices, which averaged $2.79 per gallon in November, are expected to average $2.96 per gallon in 2010.  Residential heating oil prices this winter (October through March) are projected to average $2.77 per gallon, compared with $2.63 per gallon last winter.

Natural Gas

U.S. Natural Gas Consumption.  EIA expects total natural gas consumption will decrease by 1.9 percent in 2009 and by an additional 0.4 percent in 2010.  A steep decline in demand by the industrial sector, and smaller but significant declines in the residential and commercial sectors, have been partially offset by consumption growth in the electric power sector this year.  Low natural gas prices relative to coal caused substantial switching to natural gas for baseload electric power generation throughout most of 2009.  However, in recent weeks, natural-gas-fired generation has been closer to year-ago levels because of the seasonal increase in natural gas prices and the decrease in coal prices driven by historically high coal stocks.  In addition, warmer-than-normal weather over the eastern United States during November depressed seasonal space-heating demand in the residential and commercial sectors.  This weaker consumption is evident in natural gas working inventories, which increased by an estimated 9 billion cubic feet ( Bcf) during November compared with the previous 5-year average decline of about 57 Bcf over the month. 

A return to normal weather and expectations for economic growth are the primary drivers in EIA’s forecast for consumption increases in the residential, commercial, and industrial sectors in 2010.  However, EIA still expects total consumption to fall as higher natural gas prices contribute to some reversal of the coal-to-natural-gas switching that took place in the electric power sector during 2009.

U.S. Natural Gas Production and Imports.  EIA expects total marketed natural gas production will increase by 3.7 percent in 2009, followed by a decline of 3.1 percent in 2010.  Minimal hurricane disruptions and significant growth in production from onshore shale basins have contributed to the increase in domestic supply this year, despite a nearly 60-percent decline in the working natural gas rig count from September 2008 to July 2009.  According to Baker Hughes, the working natural gas rig count is currently 748, up 83 from the low of 665 this past July.  Although marketed production in the Lower-48 non-Federal Gulf of Mexico has declined since peaking in February 2009, the recent dip in September production appears to be the result of shut-ins, maintenance, and pipeline constraints, as opposed to declining field productivity.  Production volumes are expected to have recovered in October and November.  Shorter completion times and enhanced well productivity in shale basins contributed to sustained higher production levels amidst a dramatically lower rig count in 2009.

U.S. pipeline imports averaged about 9 Bcf/d through the first 9 months of 2009, compared with 9.9 Bcf/d during the same period last year.  Lower drilling activity and natural gas production in Canada have contributed to reduced pipeline import flows this year.  EIA expects pipeline imports to fall by 12 percent for the year.  The persistence of low rig counts in Canada leads to lower expected Canadian natural gas production and lower U.S. pipeline imports next year.  Offsetting a portion of the decline in pipeline imports, U.S. liquefied natural gas (LNG) imports increased in 2009, averaging about 1.3 Bcf/d through September compared with almost 1.0 Bcf/d during the same period last year.  Imports rose, albeit from very low levels in 2008, as new global liquefaction capacity added to supply while global LNG demand suffered under the economic crisis.  EIA expects that U.S. LNG imports will increase to 1.7 Bcf/d in 2010 with the expected completion of additional global LNG supply projects, although the start-up dates for supply additions have historically been subject to delay. 

U.S. Natural Gas Inventories.  On November 27, 2009, working natural gas in storage was 3,837 Bcf, 487 Bcf above the 5-year average (2004–2008) and 470 Bcf above the level during the corresponding week last year.  Assuming a storage withdrawal between the end of November and the end of  March about 6.1 percent (113 Bcf) greater than the previous 5-year average for that period, end-of-winter (March 31, 2010) stocks will be about 1,845 Bcf.  This would be the highest end-of-winter storage level since 1991, when inventories measured 1,912 Bcf. 

U.S. Natural Gas Prices.  The Henry Hub spot price averaged $3.77 per Mcf in November, $0.35 per Mcf lower than the average spot price in October.  Prices were depressed as warmer-than-normal weather in November reduced seasonal residential and commercial space-heating consumption by about 1.7 Bcf/d, or about 7 percent, below the projected 22.85 Bcf/d consumption in last month’s Outlook.  EIA expects prices to increase as space-heating demand rises in the coming months.  However, strong domestic production, a retrenchment of electric-power-sector natural gas demand, and uncertainty about the extent of recovery in the industrial sector, should limit sustained upward price movements through the winter and well into next year.  The projected Henry Hub spot price averages $3.95 per Mcf in 2009 and $4.62 per Mcf in 2010.

Market participants were pricing gas delivered to Henry Hub in January 2010 through futures contracts at $4.76 per million Btu (MMBtu) ($4.90 per Mcf) during the 5 days ended December 3.  Implied price volatility for the January 2010 natural gas futures contract averaged just over 56 percent.  This translates into a 95-percent confidence interval with a lower limit of $3.60 and an upper limit of approximately $6.30 per MMBtu for the January 2010 contract.  The implied price volatility reflects market participants’ uncertainty over how production, demand, and high inventories will be balanced in the upcoming winter heating season. 

At this time last year, natural gas for delivery in January 2009 to the Henry Hub was trading at $6.38 per MMBtu, and the implied volatility was almost 68 percent.  This translated into a lower and upper limit of $4.65 and $8.75 per MMBtu, respectively, for the 95-percent confidence interval.

Electricity

U.S. Electricity Consumption.  Retail sales of electricity to the industrial sector from January through September 2009 were down by about 12 percent compared with the same period last year, similar to the decline in the U.S. manufacturing production index.  EIA’s assumption of 3.6 percent growth in manufacturing during 2010 translates to an expected growth in electricity sales to the industrial sector of about 1.1 percent.  EIA forecasts electricity sales to the residential and commercial sectors to increase by 2.4 percent and 1.2 percent, respectively, in 2010 with total electricity consumption increasing by 1.6 percent.

U.S. Electricity Generation.  The projected share of electricity generated by natural gas in the electric power sector falls from 22 percent in 2009 to 21 percent next year.  This reduction will be offset by expected increases in generation from coal-fired plants, as a result of switching away from higher-priced natural gas generation and from renewable sources, especially as a result of increased windpower capacity.

U.S. Electricity Retail Prices.  EIA expects delivered natural gas fuel costs for generating electricity to rise by 10 percent next year.  However, lower delivered coal costs combined with comparatively more generation from coal should reduce residential electricity prices by about 0.9 percent next year.

Coal

U.S. Coal Consumption.  Coal consumption by the electric power sector fell nearly 12 percent for the first 9 months of 2009 in response to lower total electricity generation coupled with increases in generation from other sources, natural gas, hydropower, and wind.  An expected continuation of these trends for the rest of the year leads to an annual decline in electric-power-sector coal consumption of almost 10 percent.  Projected increases in electricity demand and higher natural gas prices will contribute to growth in coal-fired generation in 2010.  Forecast coal consumption in the electric power sector increases by nearly 4 percent in 2010 but remains below 1 billion short tons for the second consecutive year.  Coal consumed for coke production declined by 30 percent in the first half of 2009 compared with the first half of 2008.  Consumption of coal at coke plants rises in 2010 as economic conditions improve, with an increase of more than 3 million short tons (21 percent). EIA projects 3-percent growth in 2010 for coal consumption in the retail and general industry sectors, following a 17-percent decline in 2009.

U.S. Coal Supply.  Coal production for the first 3 quarters of 2009 fell by 6 percent in response to lower U.S. coal consumption, fewer exports, and higher coal inventories.  These conditions are expected to persist for the remainder of 2009, with an annual decline in coal production of nearly 7 percent.  Production declines by an additional 2.5 percent in 2010 in this forecast despite increases in domestic consumption and exports.  Balance is maintained through a reduction in coal inventories and increased imports.   

U.S. Coal Prices.  Despite decreases in spot coal prices, lower prices for other fossil fuels, and declines in demand for coal for electricity generation, EIA expects the delivered electric-power-sector coal price to average about $2.22 per MMBtu for 2009, a 7-percent increase.  This higher cost of delivered coal is due to the significant portion of power‐sector coal contracts initiated during a period of high prices for all fuels.  The projected electric-power-sector delivered coal price falls by 8 percent to average $2.03 per MMBtu in 2010.

U.S. Carbon Dioxide Emissions

Projected carbon dioxide (CO2) emissions from fossil fuels fall by an estimated 6.1 percent in 2009.  Emissions from coal leads the drop in 2009 CO2 emissions, falling by more than 10 percent.  Changes in energy consumption in the industrial sector, a result of the weak economy, and changes in electricity generation sources are the primary reasons for the decline in CO2 emissions.  Projected improvements in the economy contribute to an expected 1.5-percent increase in CO2 emissions in 2010.

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