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Short-Term Energy Outlook – October 2004
October 6th , 2004 Release (Next Update: November 9th, 2004)

Short-Term Energy Outlook October 2004

Winter Fuels Outlook

This winter, residential space-heating expenditures are projected to increase for all fuel types compared to year-ago levels. Increases in heating fuel prices are likely to generate higher expenditures even in regions where demand for fuel is expected to fall. Average residential natural gas prices are expected to be 11 percent higher than they were last winter, and household expenditures are expected to be 15 percent higher. Heating oil prices are expected to average 29 percent higher compared with last winter and household expenditures are expected to be 28 percent higher. Propane prices are expected to average 17 percent above last winter, with 22 percent higher expenditures for propane-heated households. For details, see “Winter Fuels Outlook: 2004-2005.”

Crude Oil and Petroleum Products (Figures 1 to 5)

U.S. spot prices for crude oil (West Texas Intermediate (WTI)) continue to fluctuate above the $45 per-barrel range. The projected average WTI price for the fourth quarter of 2004 is $46.40 per barrel, about $5 per barrel higher than in the previous Outlook.

Prices continue to remain high even though Organization of Petroleum Exporting Countries (OPEC) crude oil production reached its highest levels in September since OPEC quotas were established in 1982. OPEC crude oil production in September reached 30 million barrels per day, 400,000 barrels per day higher than the August level, largely because of increased Iraqi production.

OPEC production capacity remains about 0.5-1.0 million barrels per day above current OPEC crude oil production levels.

Overall oil inventories in the United States and the rest of the industrialized world remain below normal, largely because almost 500,000 barrels per day of production were lost during the September hurricanes in the Gulf of Mexico region. Industry officials estimate that resumption of normal operations could take between 45 and 90 days. Below-normal oil inventories across the industrialized countries have contributed to concerns about the adequacy of supply to meet rapidly expanding global oil demand. As a result, average monthly WTI prices are not likely to fall below $40 per barrel until the end of 2005.

World petroleum demand growth for 2004 has been revised upwards to 2.6 million barrels per day, reflecting 3.3 percent growth over 2003, an increase of 200,000 barrels per day from the last Outlook. However, in 2005, global oil demand is expected to slow to 2.6 percent as high world oil prices begin to slow the pace of world economic growth.

U.S. petroleum demand in 2004 is projected to average 20.4 million barrels per day, up 1.9 percent from last year. However, in 2005, U.S. demand is projected to slow to 1.2 percent, in response to the combined effects of somewhat slower economic growth and high crude oil and product prices. Motor gasoline growth is expected to average 1.6 percent in 2004 and 1.5 percent in 2005. Following three years of decline, jet fuel demand is expected to display the highest growth rate of all the major fuels, averaging 4.2 percent in 2004 and 2005. Growth in distillate consumption, on the other hand, is projected to slow to about 1 percent next year after posting a more robust 3-percent rate in 2004, in part due to weather-related factors. Responding to high crude oil prices, demand for residual fuel oil is projected to decline this year and to remain about flat in 2005.

Since the third week of June, the U.S. monthly average pump price for regular gasoline has varied from the upper $1.80’s to the low $1.90’s per gallon. between the upper $1.80’s and low $1.90’s per gallon On October 4, 2004, the average price was $1.94 per gallon, about 12 cents below the peak level recorded in EIA’s weekly survey on May 24 of this year. However, spot prices for gasoline have increased recently in response to higher crude oil costs, and gasoline inventories shifted toward the lower end of their normal range at the end of September from the upper end of their normal range in August. High current and projected crude oil costs suggest that large reductions in average gasoline prices are unlikely anytime soon. Motor gasoline prices are expected to average $1.89 per gallon in the fourth quarter of this year compared to $1.78 per gallon projected in the previous Outlook.

Natural Gas (Figures 6 to 7)

Natural gas prices weakened in August as cooling demand levels and peak power demand remained well below normal. However, current and futures prices increased in the latter half of September in response to natural gas production losses in the Gulf of Mexico caused by Hurricane Ivan. The average spot price for natural gas at the Henry Hub for the month of September was $5.15 per thousand cubic feet (mcf). Henry Hub prices are expected to average $6.10 per mcf in 2004 and $6.18 per mcf in 2005.

The loss of natural gas production resulting from the Gulf hurricanes in September lowered last month’s more optimistic injections rate, resulting in an estimated end-September level of working gas in storage of 3,065 billion cubic feet, about 1 percent below last month’s projection, but still about 8 percent above the 5-year average . Spot prices are still expected to rise significantly once the heating season gets under way.

With continuing high rates of drilling for natural gas in North America, 2005 domestic production is projected to grow by 1.4 percent. Steady, if modest, increases in liquefied natural gas imports, restrained export growth, and carryover from the robust storage levels noted above are expected to contribute to moderate improvement in the supply picture through 2005.

Electricity and Coal Outlook (Figures 8 to 10)

Electricity demand is expected to increase by 1.7 percent this year and by another 2.7 percent in 2005. Projected electricity demand in the fourth quarter of 2004 is 3.2 percent above the prior-year level, when heating-related demand was depressed by comparatively mild weather conditions.

Coal demand in the electric power sector is expected to show steady gains of 1.0 percent this year and 2.5 percent next year. Despite higher spot prices for coal, power sector demand for reflecting the impact of growing demand, coal continues to increase as oil and gas prices remain high and hydroelectric power availability remains low in 2004. U.S. coal productionis expected to grow by 3.4 percent in 2004 and by another 3.5 percent in 2005.