According to the U.S. Energy Information Administration (EIA), Brent crude will average lower in the next two years with WTI projected mildly softer. These reductions are expected to fuel slightly lower prices for gasoline and diesel fuel. Meanwhile domestic crude production is projected to increase by over 15 percent by 2014. Natural gas, however is expected to rise at Henry Hub by over a dollar by 2014 compared to 2012 pricing. Highlights from today's EIA Short-Term Energy Outlook report follow:
Crude Oil --
EIA expects that the Brent crude oil spot price, which averaged $112 per barrel in 2012 and rose to $119 per barrel in early February 2013, will average $109 per barrel in 2013 and $101 per barrel in 2014. The projected discount of West Texas Intermediate (WTI) crude oil to Brent, which averaged $18 per barrel in 2012, averages $9 per barrel in 2014 as planned new pipeline capacity lowers the cost of moving mid-continent crude oil to the Gulf Coast refining centers.
January saw a broad-based rally in most commodity and equity markets around the world. Contributors to the increase in oil prices included bullish economic data for the U.S. housing market, upbeat corporate earnings report, and reaffirmation by the Federal Reserve of its commitment to an open-ended bond-buying program, also known as quantitative easing. On the supply side, Saudi Arabia lowered production of crude oil from 9.8 million barrels per day in September 2012 to an estimated 9.1 million barrels per day in January 2013.
The Brent-WTI price spread moved lower in the first half of January and settled at a 7 month low of $15.61 per barrel on January 17. The decrease in the spread was due to increased volumes of crude oil being moved by pipeline from Cushing, Oklahoma, to refineries on the U.S. Gulf Coast through the recent Seaway Pipeline expansion. However, on January 23, Seaway operators announced that the pipeline will run at reduced capacity until the third or fourth quarter of this year while additional infrastructure is built to alleviate a crude oil bottleneck at one of the pipeline terminals. Subsequently, the Brent-WTI spread increased to settle at $21.41 per barrel on February 7.
Falling crude prices will contribute to a decline in the national annual average regular gasoline retail price from $3.63 per gallon in 2012 to $3.55 per gallon in 2013 and $3.39 per gallon in 2014, about 11 cents per gallon and 4 cents per gallon higher than forecast in last month's STEO, respectively. Diesel fuel retail prices averaged $3.97 per gallon during 2012 and are forecast to fall to $3.92 per gallon in 2013 and to $3.82 per gallon in 2014.
EIA estimates U.S. total crude oil production averaged 6.4 million barrels per day (bbl/d) in 2012, an increase of 0.8 million bbl/d from the previous year. Projected domestic crude oil production continues to increase to 7.3 million bbl/d in 2013 and 7.8 million bbl/d in 2014.
Market Derived Probabilities: The May 2013 WTI futures contract averaged $97.55 per barrel for the five trading days ending February 7 and has a probability of exceeding $100 per barrel at expiration of approximately 38 percent. The same contract for the five trading days ending January 2 had a probability of exceeding $100 of 29 percent. An increase in crude oil prices more than offset lower implied volatility and less time to expiration and resulted in increased probabilities to exceed higher prices. Given the elevated price of Brent relative to WTI, the probability of Brent futures contracts expiring above different dollar thresholds is higher.
Natural Gas --
Natural gas working inventories reached a record-high level in early November 2012, but ended January 2013 at an estimated 2.7 trillion cubic feet (Tcf), about 0.2 Tcf below the level at the same time the previous year. EIA expects the Henry Hub natural gas spot price, which averaged $2.75 per million British thermal units (MMBtu) in 2012, will average $3.53 per MMBtu in 2013 and $3.84 per MMBtu in 2014.
The front month futures price settled at $3.29 per MMBtu on February 7, increasing $0.05 per MMBtu from the price on January 2 (Figure 13). Colder weather provided support for a brief rise in prices in mid-January and, despite recent declines, prices remain higher than at the beginning of January.
The most notable development in natural gas markets during January was the very high prices in the northeast during cold weather in the middle of the month. The New England basis, or the difference of spot prices between New England and Louisiana's Henry Hub, was sharply higher during the recent cold weather. On January 25, the spot price in New England was $31.10 per MMBtu higher than the Henry Hub price
Market Derived Probabilities: The probability that the May 2013 contract will settle higher than $4.00 per MMBtu declined by 7 percentage points from 21 percent to 14 percent when compared to market conditions on the five trading days ending January 2. Lower volatility was the main cause for the drop in the probability of exceeding higher price levels by the expiration of the May 2013 futures contract.