Highlights

Volatility persists for crude oil spot prices, although over narrower ranges than seen earlier this year and last year. EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $70 per barrel in the fourth quarter of 2009, a $27-increase over the first quarter of the year.

EIA expects the monthly average regular-grade gasoline retail price to fall from $2.62 per gallon in August and September to an average of $2.56 per gallon over the fourth quarter of 2009. Higher crude oil prices next year contribute to an increase in the annual average gasoline retail price from $2.34 per gallon in 2009 to $2.70 in 2010. Projected annual average diesel fuel retail prices are $2.47 and $2.88 per gallon in 2009 and 2010, respectively.

EIA projects the monthly Henry Hub natural gas spot price to average $2.32 per thousand cubic feet (Mcf) in October, the lowest monthly average spot price since September 2001. Natural gas inventories likely will 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 $3.65 per Mcf in 2009 to $4.78 in 2010. However, upward price pressure next year is limited by the sensitivity of natural gas use in the electric power sector to higher natural gas prices and continued expansion of U.S. natural gas production from shale formations.

EIA expects electricity retail prices to show year-over-year declines next year for the first time since early 2003 because of lower fossil fuel costs for generation. The projected annual average 2010 residential electricity price of 11.4 cents per kilowatthour is about 2 percent lower than the 2009 average.

Global Crude Oil and Liquid Fuels

Global Petroleum Overview
WTI oil prices hovered in the $67-to-$74-per-barrel range in August as expectations of an economic recovery and higher oil consumption in the future were weighed against weak current demand and high inventories. As long as oil prices remain in their current range, EIA expects the Organization of the Petroleum Exporting Countries (OPEC) to maintain its existing production targets.

Global Petroleum Consumption
Preliminary data indicate that global oil consumption declined by 3 million barrels per day (bbl/d) in the second quarter of 2009 compared with year-earlier levels. Members of the Organization for Economic Cooperation and Development (OECD) accounted for most of the decline; total non-OECD consumption was virtually unchanged. The current macroeconomic outlook assumes that the world economy begins to recover at the end of this year, 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, the first such growth in 5 quarters. Projected world oil consumption grows by 0.9 million bbl/d in 2010, with relatively strong growth in non-OECD countries being partially offset by a slight decline in OECD consumption (World Liquid Fuels Consumption Chart).

Non-OPEC Supply
Total non-OPEC supply averaged 50.1 million bbl/d in the second quarter of 2009, about 0.3 million bbl/d higher than in the second quarter of 2008. The largest amount of growth came from Central and South America (0.3 million bbl/d) and the Former Soviet Union (0.3 million bbl/d), which was offset by a 0.3 million bbl/d decline in Europe. Over the forecast period, higher output from Brazil, the United States, Azerbaijan, Kazakhstan, and Canada offsets 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 second quarter of 2009, similar to first quarter levels, but down 3 million bbl/d from peak production in the third quarter of 2008. The combination of higher prices and OPEC's historical tendency for weaker compliance with production targets over time (see This Week in Petroleum, August 12, 2009) suggests that OPEC crude oil production could rise over the remainder of the year, unless prices fall sharply from current levels. Projected OPEC crude oil production climbs to 29.3 million bbl/d in the second half of 2009, then averages 28.9 million bbl/d in 2010.

Global Petroleum Inventories
Based on preliminary data, OECD commercial oil inventories stood at 2.74 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 at above-average levels throughout the forecast period because of weakness in global oil consumption and continuing contango in the futures market, i.e., relatively high future prices compared with current prices.

Crude Oil Prices
Equity-market and exchange-rate expectations continue to be cited by market analysts as proximate causes of oil-price behavior, in addition to changing expectations of global oil consumption growth. EIA projects that WTI crude oil prices will average $69 per barrel in the second half of 2009, $19 per barrel lower than in the second half of 2008 (Crude Oil Prices Chart). This projection is largely unchanged from last month's Outlook and reflects the view that an expected economic upturn will restore oil demand growth and gradually work off the surplus oil inventories. Although a consensus seems to be forming that the global economic downturn may have bottomed out, there still remains considerable uncertainty regarding the timing and pattern of any economic recovery.

U.S. Crude Oil and Liquid Fuels

U.S. Petroleum Consumption
EIA forecasts total consumption of liquid fuels and other petroleum products to decrease by about 800,000 bbl/d (4 percent) in 2009 (U.S. Petroleum Products Consumption Growth Chart) compared with 2008. During the first half of the year, consumption declined by almost 1.25 million barrels per day (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 300,000 barrels per day (1.6 percent) in the second half of 2009 as economic recovery begins to take hold. Monthly average motor gasoline consumption in June showed an increase over the same month from the prior year for the first time since September 2007 and continues to grow over year-ago levels through the forecast. The modest economic recovery projected for 2010 contributes to a 260,000-bbl/d (1.4 percent) increase in total liquid fuels consumption, led by increases of 110,000 bbl/d (2.9 percent) in distillate consumption, 60,000 bbl/d (0.6 percent) in motor gasoline consumption, and 10,000 bbl/d (0.7 percent) in jet fuel consumption.

U.S. Petroleum Supply
EIA projects total U.S. crude oil production to average 5.24 million barrels per day in 2009 and increase to an average of 5.30 million bbl/d in 2010 (U.S. Crude Oil Production Chart). Crude oil production from the new 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. Petroleum Product Prices
EIA expects the monthly average regular-grade gasoline retail price to fall from $2.62 per gallon in August and September to an average $2.56 per gallon over the last 3 months of the year. Higher projected crude oil prices in 2010 (about $12 per barrel, or 29 cents per gallon, higher than the 2009 average) increase regular-grade gasoline prices to an average of $2.70 per gallon next year. Projected diesel fuel retail prices, which averaged $2.63 per gallon in August, increase over the next few months to average $2.74 during the fourth quarter of 2009 as the winter heating fuel season begins.

Natural Gas

U.S. Consumption
EIA projects that total natural gas consumption will likely decline by 2.4 percent in 2009 and remain flat in 2010 (Total U.S. Natural Gas Consumption Growth Chart). Despite low relative prices for much of the year, industrial natural gas consumption declined by 12 percent in the first 6 months of 2009 compared with the same period last year. EIA expects this year-over-year consumption decline will continue through the second half of the year for industrial users, although the trend will be less pronounced. Conversely, EIA expects natural gas use in the electric power sector will increase by 4.3 percent on a year-over-year basis during the second half of 2009 as natural gas continues to compete with coal for a share of the baseload power supply at current prices.

EIA expects natural gas consumption will increase slightly in the commercial and industrial sectors in 2010 as a result of improved economic conditions and low prices. Consumption remains relatively flat in the residential and electric power sectors next year. The anticipated addition of new coal-fired generating capacity and rising natural gas prices limits the potential for significant increases beyond the forecast 2009 level in natural gas consumption by electric generators.

U.S. Production and Imports
EIA expects total U.S. marketed natural gas production to increase by 0.9 percent in 2009 and fall by 3.5 percent in 2010. Despite a 20-percent drop in prices and a 45-percent drop in working natural gas drilling rigs since the start of the year, total natural gas production increased slightly from January to June 2009. This current production trend reflects significant improvements in horizontal drilling technology and robust productivity from shale gas discoveries in Louisiana, Oklahoma, Arkansas, and Pennsylvania. While lower prices have caused a reduction in drilling activity by all rig types, according to data compiled by Smith International, working horizontal rigs have fallen by only 27 percent since the start of the year compared with a 65-percent decrease among vertically-directed rigs. Working horizontal drilling rigs now represent more than half of the active natural gas drilling fleet.

As U.S. natural gas inventories swell to record-high levels, some curtailment of production is expected. The sustained reduction in drilling activity and production curtailments are projected to result in a 5.7-percent decline in marketed production from the Lower-48 non-Gulf of Mexico (GOM) between the first and second half of the year. The projected 1.3-percent increase in Federal GOM production during the second half of 2009 over the first half results from the addition of new producing wells and continued recovery from damage sustained during last year's hurricane season.

Projected U.S. liquefied natural gas (LNG) imports increase to about 460 billion cubic feet (Bcf) in 2009 from 350 Bcf in 2008 and rise to about 660 Bcf in 2010. Maintenance to existing LNG supply facilities and delays to new liquefaction projects, in addition to higher world oil prices during the second half of 2009, contribute to the 43-Bcf downward revision in the 2009 LNG import forecast from last month's Outlook.

U.S. Inventories
On August 28, 2009, working natural gas in storage was 3,323 Bcf (U.S. Working Natural Gas in Storage Chart). Current inventories are now 501 Bcf above the 5-year average (2004-2008) and 489 Bcf above the level during the corresponding week last year. While weekly stocks could exceed reported end-of-month levels, EIA now expects working natural gas inventories to reach 3,840 Bcf at the end of the 2009 injection season (October 31). This would be 275 Bcf above the previous record of 3,565 Bcf reported for the end of October 2007. The working gas inventory forecast assumes weekly storage injections will average about 57 Bcf over the next 9 weeks, compared with average storage injections of about 60 Bcf per week over this period during the previous 5 years.

U.S. Prices
The Henry Hub spot price averaged $3.23 per Mcf in August, $0.25 per Mcf below the average spot price in July. Prices continue to be pushed lower as robust production adds to already high inventories. As electric power demand for air conditioning wanes, a continuation of recent natural gas supply trends could cause spot natural gas prices to fall below current projections before cooler temperatures induce higher demand for space heating. In the projections, prices rise modestly in 2010, reflecting increased economic activity and lower production levels as a result of the current drilling pullback. However, it will take some time to work off current inventory levels and enhanced production capabilities should limit significant increasesin prices throughout the forecast period. On an annual basis, the projected Henry Hub spot price averages $3.65 Mcf in 2009 and $4.78 Mcf in 2010.

Electricity

U.S. Electricity Consumption
Total U.S. electricity consumption fell by 4.4 percent during the first half of the year compared with the same period in 2008, primarily because of the effect of the economic downturn on industrial electricity sales. The expected year-over-year decline in total consumption during the second half of 2009 is smaller, a 2.3-percent decline, as residential sales begin to recover (U.S. Total Electricity Consumption Chart).

U.S. Electricity Generation
While generation from coal fell by 12 percent in the first half of the year compared with the same period in 2008, natural gas generation has risen by 3 percent. Lower coal prices relative to natural gas prices next year and the planned addition of up to 10 gigawatts of coal capacity during 2009 and 2010 could mitigate or reverse the fuel-switching trend.

U.S. Retail Electricity Prices
EIA significantly lowered its electricity retail price projections through 2010 from last month’s Outlook due to the dramatic decline in natural gas fuel costs for power generation (U.S. Residential Electricity Prices Chart). Although retail residential prices during the first half of this year are up by 5 percent from the same period last year, EIA expects prices during the second half will show little change from the second half of last year. The projected annual average 2010 residential electricity price of 11.4 cents per kilowatthour is about 2 percent lower than the 2009 price.

Coal

U.S. Coal Consumption
Electric-power-sector coal consumption fell by 11 percent in the first half of this year. The decline resulted from lower total electricity generation combined with increases in generation from natural gas, nuclear, hydropower, and wind. Coal is expected to regain a larger share of the baseload generation mix beginning in 2010, as natural gas prices begin to rise. Projected coal consumption in the electric power sector increases by almost 2 percent in 2010 but remains below the 1-billion short-ton level for the second consecutive year. Coal consumed for steam (retail and general industry) and coke production declined by 15 percent in the first quarter of 2009 compared with the first quarter of last year. In the forecast, lower consumption of coal in both sectors continues for the remainder of the year, followed by a combined increase in coal consumed by these sectors of more than 5 percent in 2010 (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 in the forecast for the remainder of 2009. Projected production declines by 1.4 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
The monthly average delivered electric-power-sector coal price reached a record high of $2.29 per million Btu in March 2009. The delivered cost of coal to the electric power sector had continued to rise, despite decreases in spot coal prices, lower prices for other fossil fuels, and declines in demand for coal for electricity generation, because a significant portion of power-sector coal contracts was entered into during a period of high prices for all fuels. The projected average power-sector coal price of $2.18 per million Btu for September 2009 represents the first decline in price from the same month of the prior year since 2002. Projected power-sector coal prices fall over the forecast to about $1.95 per million Btu in December 2010.

Carbon Dioxide Emissions

Projected carbon dioxide (CO2) emissions from fossil fuels fall by 6.0 percent in 2009 because of the weak economic conditions and declines in the consumption of most fossil fuels (U.S. Carbon Dioxide Emissions Growth Chart). Coal leads the drop in 2009 CO2 emissions, falling by nearly 10 percent because of fuel switching from coal to natural gas in the electric power sector. The projected recovery in the economy contributes to an expected 0.9-percent increase in CO2 emissions in 2010.

OPEC Oil Export Revenues

Based on projections from the EIA September 2009 (STEO), members of the Organization of the Petroleum Exporting Countries (OPEC) could earn $559 billion of net oil export revenues in 2009 and $675 billion in 2010. Last year, OPEC earned $971 billion in net oil export revenues, a 42 percent increase from 2007. Saudi Arabia earned the largest share of these earnings, $288 billion, representing 30 percent of total OPEC revenues. On a per-capita basis, OPEC net oil export earning reached $2,688 in 2008, a 40 percent increase from 2007.

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