Energy Outlook

• EIA projects average household expenditures for space-heating fuels to be $960 this winter (October 1 to March 31), a decrease of $84, or 8 percent, from last winter.  This forecast principally reflects lower fuel prices, although expected slightly milder weather than last winter will also contribute to lower fuel use in many areas.  The largest expenditure decreases are in households using natural gas and propane, projected at 12 and 14 percent, respectively.  Projected electricity and heating oil expenditures decline by 2 percent (see EIA Short Term and Winter Fuels Outlook slideshow).

• According to the National Oceanic and Atmospheric Administration’s (NOAA) most recent projection of heating degree-days, the Lower-48 States are forecast to be 1 percent warmer this winter compared with last winter and 1 percent milder than the 30-year average (1971-2000).  However, heating degree-day projections vary widely between regions.  For example, the Midwest, a major market for propane and natural gas, is projected to be about 4 percent warmer than last winter, while the West is projected to be about 4 percent colder. 

• EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $70 per barrel this winter (October-March), a $19 increase over last winter.  The forecast for average WTI prices rises gradually to about $75 per barrel by December 2010 as U.S. and world economic conditions improve.  EIA’s forecast assumes U.S. GDP grows by 1.8 percent in 2010 and world oil-consumption-weighted GDP grows by 2.6 percent.

• Energy prices remain volatile, reflecting uncertainty, or risk, in the market.  To measure this uncertainty, EIA is tracking futures prices and the market’s assessment of the range in which those futures prices might trade (see STEO Supplement: Energy Price Volatility and Forecast Uncertainty).  The Outlook will now report confidence intervals around the New York Mercantile Exchange (NYMEX) crude oil and natural gas futures prices using a measure of risk derived from the NYMEX options markets known as “implied volatility.”

• Natural gas inventories are expected to set a new record high at the end of this year’s injection season (October 31), reaching more than 3.8 trillion cubic feet (Tcf).  The projected Henry Hub annual average spot price increases from $3.85 per thousand cubic feet (Mcf) in 2009 to $5.02 in 2010.

Projected Winter Fuel Expenditures by Fuel and Region

The average household winter heating fuel expenditures discussed in this Outlook provide a broad guide to changes compared with last winter, but fuel expenditures for individual households are highly dependent on local weather conditions, market size, the size and energy efficiency of individual homes and their heating equipment, and thermostat settings.

Natural Gas.  EIA expects households heating primarily with natural gas to spend an average of $105 (12 percent) less this winter.  About 52 percent of all households depend on natural gas as their primary heating fuel.  The 12-percent decline in natural gas expenditures reflects an 11-percent decrease in prices and a 1-percent decrease in consumption.  In the Midwest, where more than 70 percent of all households rely on natural gas, a projected 15-percent decrease in average household expenditures results from an 11-percent decrease in prices and a decline in consumption of 4 percent based on the forecast of warmer weather than last winter.

Heating Oil.  EIA expects households heating primarily with heating oil to spend an average of $40 (2 percent) less this winter.  About 7 percent of U.S. households depend on heating oil for winter fuel.  The Northeast accounts for 80 percent of heating fuel consumption.  In that region, the average household is projected to spend 3 percent less ($60) than last winter as a result of a 2-percent decrease in consumption, with regional prices about 1 percent less than last winter.  EIA projects residential heating oil prices in the Northeast to average about $2.64 per gallon during the winter season, 2 cents less than last winter.  For comparison, prices averaged $3.31 in the winter of 2007-08.

Propane.  EIA expects households heating primarily with propane to spend an average of $280 (14 percent) less this winter but that decrease varies broadly by region.  EIA expects Midwestern households to see an average reduction in expenditures of 21 percent, and homes in the West 5 percent less this winter.  One-half of the difference in the change in fuel bills between the two regions is due to weather with the Midwest about 4 percent warmer and the West about 4 percent colder than last winter.  Propane-heated households represent about 6 percent of total U.S. households.

Electricity.  Households heating primarily with electricity can expect to spend an average of $20 (2 percent) less than last winter.  The 2-percent decline in electricity expenditures reflects a 2-percent decrease in prices and very little change in consumption.  Thirty-five percent of all U.S. households rely on electricity as their primary heating fuel, ranging from 13 percent in the Northeast to 59 percent in the South.  The number of households heating with electricity is growing faster, at an estimated annual rate of 2.5 percent, than all the other major heating fuels.

Global Crude Oil and Liquid Fuels

Global Petroleum Overview.  Sustained economic growth in China and signs of a turnaround in other Asian countries continue to fuel expectations of a global recovery in world oil consumption.  EIA has revised its expectations for world oil consumption upwards by 0.2 million barrels per day (bbl/d) for the remainder of 2009 and for 2010, in large part because of the revision to Asian growth.  However, EIA has not revised its WTI oil price projections upward because ample oil supplies remain on the market.  Oil inventories remain high and EIA expects oil production by the Organization of the Petroleum Exporting Countries (OPEC) to increase as well.

Global Petroleum Consumption.  Global oil consumption declined by 3.2 million bbl/d in the first half of 2009 compared with year-earlier levels. Members of the Organization for Economic Cooperation and Development (OECD) accounted for most of the decline, as non-OECD oil consumption was down by about 0.4 million bbl/d during that period.  Preliminary data indicate that oil consumption in the third quarter of 2009 was 1.2 million bbl/d below year-earlier levels.  EIA’s current macroeconomic outlook assumes that the world economy begins to recover at the end of 2009, led by non-OECD Asia.  As a result, EIA expects world oil consumption to grow in the fourth quarter of 2009 compared with year-earlier levels, which would be the first such growth in five quarters.  EIA projects world oil consumption growth of 1.1 million bbl/d in 2010, with almost all of the growth occurring in the non-OECD countries (World Liquid Fuels Consumption Chart).

Non-OPEC Supply.  Total non-OPEC supply averaged 50.1 million bbl/d in the first half of 2009, about 0.2 million bbl/d higher than in the first half of 2008.  The largest amount of growth came from South America and the former Soviet Union, which was offset in part by a decline in European production.  Non-OPEC supply is expected to increase by 0.6 million bbl/d in the second half of 2009 and by 0.2 million bbl/d in 2010, compared with year-earlier levels.  Over the forecast period, higher output from Brazil, the United States, Azerbaijan, Kazakhstan, and Canada should offset falling production in Mexico and the North Sea (Non-OPEC Crude Oil and Liquid Fuels Production Growth Chart).

OPEC Supply.  OPEC crude oil production was 28.7 million bbl/d in the first half of 2009, down 2.6 million bbl/d from year-earlier levels.  EIA expects OPEC production to rise gradually over the second half of the year in response to an anticipated rebound in demand, unless prices fall sharply from current levels.  OPEC is scheduled to meet in Angola on December 22 to reassess the market situation.  EIA projects OPEC crude oil production to climb to 29.3 million bbl/d in the second half of 2009, and then average 29.2 million bbl/d in 2010 (World Crude Oil and Liquid Fuels Production Growth Chart).

Global Petroleum Inventories.  Based on revised data, OECD commercial oil inventories stood at 2.76 billion barrels at the end of the second quarter of 2009.  At 61 days of forward cover, OECD commercial inventories were well above average levels for that time of year (Days of Supply of OECD Commercial Stocks Chart).  EIA expects OECD oil inventories to remain higher than average historical levels throughout the forecast period.

Crude Oil Prices.  WTI oil prices averaged $69 per barrel in September, about $2 per barrel below the August average, as expectations of an economic recovery and higher oil consumption were weighed down by currently weak demand and high inventories.  With prices near $70 per barrel, OPEC agreed to maintain its existing production targets, as expected, at its meeting in September.

Energy prices are volatile, primarily reflecting market participants' adjustments to new information from physical energy markets and/or energy-related financial derivatives.  EIA quantifies this uncertainty, or risk, in the market by using “implied volatilities” derived from the NYMEX options markets to construct confidence intervals around the NYMEX crude oil futures prices.  Implied volatility is calculated from traded option prices using the Black commodity option pricing model (see STEO Supplement: Energy Price Volatility and Forecast Uncertainty).  The confidence intervals reflect the range in which those prices are likely to trade.

A confidence level determines the range of prices within the confidence interval.  The confidence level represents the probability that the final market price for a particular futures contract, e.g., December 2009 crude oil, will fall somewhere within the lower and upper limits of the range of prices.  For example, if a confidence level of 95 percent is specified, then a range of prices can be estimated within which there is a 95-percent probability the delivered price for the commodity in the contract's delivery month will fall within that range.  The higher the specified confidence level, the wider the range between the lower and upper limits.

Confidence intervals tend to be wide, in part because even small imbalances in oil markets can trigger large movements in prices given that both the production and use of oil tend to be relatively insensitive to price changes in the short-run.  Increased uncertainty in consumption, production, or many other factors influencing oil prices would tend to induce an increase in implied volatility and a widening of the confidence intervals.

During the 5 days ending October 1, 2009, NYMEX futures market participants were pricing WTI delivered to Cushing, Oklahoma, in December 2009 at an average of $69 per barrel.  The 95-percent confidence interval for the December 2009 futures contract is $49 per barrel and $96 per barrel for the lower and upper limits of the confidence interval, respectively; a $47 per barrel range (West Texas Intermediate (WTI) Crude Oil Price Chart).  The low and high confidence limits correspond to a 48-percent implied volatility derived from the NYMEX options market.  Confidence intervals also tend to widen as markets look further into the future.  For example, the 95-percent lower and upper confidence limits for the December 2010 futures contract are $32 per barrel and $168 per barrel, respectively; a $136 per barrel range. While near-term implied volatilities are now lower, and confidence intervals narrower, than they were at this time last year, the current confidence intervals highlight the fact that there continues to be significant uncertainty in the outlook for oil prices.   EIA’s crude oil price forecast reflects all available data and our expert judgment, nonetheless there is a substantial likelihood that prices will diverge significantly from the forecast.

U.S. Crude Oil and Liquid Fuels

U.S. Petroleum Consumption.  EIA forecasts total consumption of liquid fuels and other petroleum products decreasing by about 730,000 bbl/d (3.7 percent) in 2009 compared with 2008 (U.S. Liquid Fuels Consumption Growth Chart).  During the first half of the year, consumption declined 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 slows to 210,000 bbl/d (1.1 percent) in the second half of 2009 as economic recovery begins to take hold.  Monthly average motor gasoline consumption since June has shown year-over-year increases for the first time since September 2007 and continues to grow over year-ago levels throughout the forecast.  The modest economic recovery projected for 2010 contributes to a 320,000-bbl/d (1.7 percent) increase in total liquid fuels consumption, led by an increase of 110,000 bbl/d (3.0 percent) in distillate consumption. 

U.S. Petroleum Supply.  EIA projects total U.S. crude oil production to average 5.27 million bbl/d in 2009 and increase to an average of 5.34 million bbl/d in 2010 (U.S. Crude Oil Production Chart).  The last year U.S. crude oil production increased was 1991.  Crude oil production from the Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields accounts for about 14 percent of Lower-48 crude oil production in the fourth quarter of 2010. 

U.S. Distillate and Propane Inventories.  As of September 30, the start of the winter heating season, total distillate fuel inventories were an estimated 170 million barrels, up about 43 million barrels from the previous year and 38 million barrels above the end-of-September average of the last 5 years.  Total distillate inventories at the end of March 2010 are projected to be 132 million barrels, about 12 million barrels above the previous 5-year average.

U.S. propane inventories were an estimated 73 million barrels at the end of September, about 14 million barrels above last year’s level and 8 million barrels above the end-of-September average over the last 5 years.  Projected propane inventories will end the winter season at about 32 million barrels, 2 million barrels above the average of the last 5 years.  Lower natural gas production over the coming months because of very high natural gas inventories in both the United States and Canada could reduce natural gas liquids and propane production and lead to lower-than-projected propane inventories next year.

U.S. Petroleum Product Prices.  EIA expects the monthly average regular-grade gasoline retail price to fall from $2.62 per gallon in August to an average of $2.44 per gallon for the last 3 months of the year.  Higher projected crude oil prices in 2010 (refiner average cost of crude oil about $12 per barrel, or 29 cents per gallon, higher than the 2009 average) lead to an expected increase in regular-grade gasoline prices to an average of $2.65 per gallon next year.  Projected diesel fuel retail prices, which averaged $2.63 per gallon in August and September, will average $2.60 during the fourth quarter of 2009 in the forecast, as the winter heating fuel season begins.

Natural Gas

U.S. Natural Gas Consumption.  Total natural gas consumption is projected to decline by 2.0 percent in 2009 and 0.2 percent in 2010 (U.S. Total Natural Gas Consumption Growth Chart).  Weak economic conditions continue to hamper the industrial sector, where the most recent data show natural gas consumption is down by 12.4 percent through July compared with the same period last year.  With lower consumption in the residential and commercial sectors as well, natural gas use in the electric power sector continues to serve as the only demand outlet for increased natural gas supplies.  EIA data indicate that electric-power-sector natural gas consumption increased by 0.4 percent in 2009 through July, compared with the same period in 2008, despite a 5.3-percent decline in total electricity generation over the same period.  Sustained low natural gas prices are expected to prolong the preferred use of natural gas in place of coal for electricity generation in some regions until space-heating demand picks up this winter.

EIA expects natural gas consumption growth in the commercial and industrial sectors in 2010 to be offset by a decline in the electric power sector.  In addition to the assumption of fewer cooling degree-days next year, higher relative natural gas prices and the start-up of new coal-fired generating capacity are all expected to contribute to a reduction in natural-gas-fired electric generation in 2010. 

U.S. Natural Gas Production and Imports.  EIA expects total U.S. marketed natural gas production to increase by 1.5 percent in 2009 and decline by 3.8 percent in 2010.  Marketed natural gas production in the Lower-48 States rose by 2.9 percent this year through July, compared with the same interval in 2008, despite a more than 40-percent decline in the working rig count since the start of the year.  While production has remained stronger than expected through much of this year, EIA expects the pullback in drilling to lead to a 3.6-percent decline in Lower-48 production from the first half to the second half of 2009.  In addition to the natural rate of decline from producing wells, the current forecast assumes some additional production curtailments as natural gas inventories begin to swell toward capacity limits this month.  Although the working rig count has begun to increase slightly in recent weeks, EIA expects domestic natural gas production to continue to fall, with marketed production during the first half of 2010 to average about 1.8 billion cubic feet (Bcf) per day lower than the second half of 2009.  However, economic recovery and increasing demand next year are expected to push prices up and provide the incentive for increasing production later next year. 

U.S. liquefied natural gas (LNG) imports increase to about 471 Bcf in 2009, from 352 Bcf in 2008, and rise to about 660 Bcf in 2010.  Higher LNG import levels may occur on a temporary basis as cargoes are redirected from Europe, where storage is reaching capacity and prices have declined.  EIA expects that the startup of several large LNG supply projects in 2010 will lead to an increase in U.S. LNG imports, although previous supply additions abroad have been slowed by construction delays and feedgas shortages that contribute to EIA’s present uncertainty about the future of current projects. 

U.S.Natural Gas Inventories.  On September 25, 2009, working natural gas in storage was 3,589 billion cubic feet (U.S. Working Natural Gas in Storage Chart).  Current inventories are now 481 Bcf above the 5-year average (2004–2008) and 491 Bcf above the level during the corresponding week last year.  Working natural gas stocks are now expected to reach 3,850 Bcf at the end of the 2009 injection season (October 31), about 40 Bcf below the sum of historical non-coincident demonstrated peak working gas storage volumes at individual active natural gas storage sites, a conservative measure of capacity that may understate the amount that could actually be stored.  (See Estimates of Peak Underground Working Gas Storage Capacity in the United States, 2009 Update).  The projected working gas inventory is about 285 Bcf above the previous record of 3,565 Bcf reported for the end of October 2007. 

U.S.Natural Gas Prices.  The Henry Hub spot price averaged $3.06 per Mcf in September, $0.17 per Mcf below the average spot price in August.  Spot prices fell early in September then moved higher as pipeline maintenance reduced available supply and natural-gas-fired electric generators increased demand.  A slight tightening of the year-over-year supply and demand balance was evident in the weekly storage injections, which averaged 67 Bcf this September compared with 72 Bcf last September.  EIA expects prices to remain low through October then begin to increase as space-heating demand picks up this winter and economic conditions improve.  Prices are expected to increase in 2010 but, even with a projected winter storage withdrawal greater than the 5-year average, end-of-March inventories still will be the highest recorded since March of 1991.  Furthermore, lower breakeven costs for domestic production and growing global LNG supply should limit sustained price increases throughout the forecast period.  EIA expects the Henry Hub spot price to average $3.85 per Mcf in 2009 and $5.02 per Mcf in 2010.

For the 5 days ending October 1, 2009, natural gas futures on the NYMEX were trading at $5.59 per MMBtu for gas delivered to Henry Hub, Louisiana, during December 2009 (approximately equal to $5.76 per Mcf assuming a natural gas heat content of 1,030 Btu per Mcf).  The 95-percent confidence interval around this price has a lower limit of $3.70 and an upper limit of $8.50, a difference of $4.80 per MMBtu, which corresponds to a 56-percent implied volatility (Henry Hub Natural Gas Price Chart).

Last year at this time, NYMEX natural gas to be delivered to Henry Hub in December 2008 was trading at $7.80 per MMBtu.  The lower and upper limits of the 95-percent confidence interval were $5.40 and $11.40, respectively.  This $6.00-per-MMBtu range corresponded to an implied volatility of 51 percent.  The current implied volatility is slightly higher than last year, but because the natural gas price is almost $2 per MMBtu lower, the price range of the 95-percent confidence interval is smaller.

Forecast Henry Hub natural gas spot prices in this Outlook are about $1 per MMBtu lower than the NYMEX futures prices.  While considerable uncertainty in the market persists, this difference reflects EIA’s expectation that a significant volume of natural gas production remains economic at prices below the current NYMEX 2010 futures prices.  Furthermore, EIA expects that natural gas demand in the electric power sector, which served as a crucial outlet for high natural gas supplies this year, will be limited in 2010 as prices move slightly higher and new coal-fired electric generation capacity becomes available.

Electricity

U.S. Electricity Consumption.  During the first half of 2009, the largest declines in residential electricity sales occurred in the western United States, while industrial sales declined most dramatically in the eastern United States.  The rate of decline in electricity consumption is expected to slow during the second half of 2009, especially in the southwestern United States, where warm temperatures increased summer air conditioning usage.  EIA projects total U.S. electricity consumption will decline by 3.3 percent in 2009 and then grow by 1.3 percent in 2010 as the improving economy leads to slowly recovering industrial sector electricity sales (U.S. Total Electricity Consumption Chart).

U.S. Electricity Generation.  According to the September Electric Power Monthly, more than 50 percent of the decline in coal generation during the first half of 2009 occurred in the Appalachian States, where spot coal prices spiked late last year.  Conversely, natural gas generation in those same States was up by 80 percent during the first half of 2009, compared with the same period last year.  EIA expects this fuel-switching trend to reverse during 2010, with generation from U.S. coal-fired plants increasing by 1.8 percent while natural gas generation falls by 1.3 percent.  This reversal is mainly the result of a number of coal-fired plants expected to begin generation in 2010.

U.S. Electricity Retail Prices.  Although increased capital construction costs for generation and transmission upgrades have resulted in higher residential electricity rates over the past year, recent steep declines in utilities’ cost of fuel for power generation and the cost of purchased power are likely to push those rates lower by about 1.6 percent in 2010 (U.S. Residential Electricity Prices Chart). 

Coal

U.S. Coal Consumption.  Coal consumption in the electric power sector fell by 11 percent in the first half of this year compared to the first half of last year, the result of lower total electricity generation combined with increases in generation from natural gas, nuclear, hydropower, and wind.  Lower electric power sector coal consumption is expected to continue for the remainder of the year with the total annual decline projected at more than 9 percent.  Coal is expected to regain a larger share of the baseload generation mix beginning in 2010, as demand for electricity grows and natural gas prices rise at the same time new coal-fired plants come online.  Projected coal consumption in the electric power sector increases by more than 2 percent in 2010 but it remains below 1 billion short-tons for the second consecutive year.  Coal consumed for steam (retail and general industry) and coke production declined by 21 percent in the first half of 2009 compared with the first half of last year.  In the forecast, lower consumption of coal in both sectors continues for the remainder of the year, followed by an increase of 5 percent in the coke sector.  EIA projects 4 percent growth in 2010 for coal use in the retail and general industry sector (U.S. Coal Consumption Growth Chart). 

U.S. Coal Supply.  Coal production for the first 6 months of 2009 fell by more than 5 percent in response to lower U.S. coal consumption, fewer exports, and higher coal inventories.  These conditions persist and increase in the forecast for the remainder of 2009.  Projected production declines by 2.3 percent in 2010, despite increases in domestic consumption and exports.  Reductions in coal inventories and increased imports offset the increase in U.S. coal consumption (U.S. Annual Coal Production Chart).

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, the monthly average delivered electric-power-sector coal price reached a record high of $2.29 per MMBtu in March 2009.  The delivered cost of coal to the electric power sector had continued to rise because a significant portion of power-sector coal contracts were initiated during a period of high prices for all fuels.  Projected power-sector coal prices fall over the forecast, averaging about $2.20 per MMBtu for 2009 and just over $2.00 per MMBtu in 2010.

Carbon Dioxide Emissions

Projected carbon dioxide (CO2) emissions from fossil fuels fall by 5.9 percent in 2009. Coal leads the drop in 2009 CO2 emissions, falling by 10.1 percent.  Changes in energy consumption in the industrial sector, a result of the weak economy, and changes in electricity generation sources are the primary factors for the decline in CO2 emissions (U.S. Carbon Dioxide Emissions Growth Chart).  The projected recovery in the economy contributes to an expected 1.1-percent increase in CO2 emissions in 2010.

A convergence of several factors has contributed to the projected decline in CO2 emissions in 2009 (see STEO Supplement:  Understanding the Decline in CO2 Emissions in 2009).  EIA estimates that the combined effects of the decline in consumption of coal and natural gas in the industrial, commercial, and residential sectors, the substitution of natural gas for coal in the electric power sector, and the forecast increase in non-CO2 emitting electricity generation (hydroelectric, nuclear, wind, solar, wood and wood waste) reduce CO2 emissions by 242 million metric tons, or 70 percent of the total projected 2009 decline.  The projected reduction in petroleum consumption accounts for the remaining 30 percent of the decline in CO2 emissions.  CO2 emissions from petroleum are expected to fall by 102 million metric tons in 2009, with over two-thirds of the decline attributable to economy-related reductions in consumption of jet fuel and distillate fuel oil, including both diesel fuel and home heating oil.  Reduced petroleum demand in industry also contribute to the overall reduction in petroleum use.

 Source: Energy Information Administration (Oct 2009)."