Energy Overview

The West Texas Intermediate (WTI) crude oil spot price is projected to average $68 per barrel in both 2006 and 2007. Summer 2006 (April 1 to September 30) regular gasoline pump prices are expected to a verage $2.76 per gallon, 39 cents higher than last year’s average of $2.37 per gallon.

Natural gas prices are projected to be lower through the rest of this year relative to the corresponding 2005 levels. The expected average for 2006 for Henry Hub spot prices of $7.74 per thousand cubic feet (mcf) is down $1.12 from the 2005 average For 2007, the Henry Hub average price will likely move back up to average $8.81 per mcf, assuming sustained high oil prices, normal weather, and continued economic expansion in the United States.

Global Petroleum Markets

Although world petroleum consumption growth has slowed because of higher prices, projected consumption growth nevertheless remains strong at 1.7 million barrels per day (bbl/d) in 2006 and 1.9 million bbl/d in 2007. Most of this consumption growth will be met by increases in non-OPEC (Organization of Petroleum Exporting Countries) production. The shortfall will be compensated for by increases in OPEC production or drawdown of inventories.

As EIA has revised historical non-OECD (Organization for Economic Cooperation and Development) demand in the International Energy Annual 2004, this new baseline has changed our forecast slightly. For 2004, non-OECD and, hence, world oil demand is assessed at about 200,000 bbl/d higher than the baseline used for the previous STEO. Changes were most noticeable in oil demand in the former Soviet Union, with demand revised lower in a few countries. This was more than made up for by a upward revision to demand in non-OECD Asia, excluding China. Going forward, growth rates in world demand based on the new baseline for 2005, 2006, and 2007 remain unchanged. Nevertheless, the higher absolute levels of demand contribute to our view of tight fundamentals throughout the forecast period.

First-quarter 2006 production data show slightly higher-than-expected non-OPEC production, but growth for the year is still expected to be 0.8 million bbl/d for 2006. This includes 0.2 million bbl/d of total liquids growth from the United States as producers continue to recover from losses suffered during the 2005 hurricane season. Outside of the United States, large new projects in 2006 and 2007 are projected to lead to production increases of almost 500,000 bbl/d in Angola, almost 400,000 bbl/d around the Caspian Sea, over 200,000 bbl/d in Canada, and almost 200,000 bbl/d in Brazil over 2006 and 2007. These new supplies will bepartially offset by declines in many mature fields, such as those in the North Sea, Mexico, and the Middle East.

US Petroleum Markets

Average domestic crude oil production is expected to increase by 157,000 bbl/d or 3.1 percent in 2006, to a level of almost 5.3 million bbl/d. For 2007, a 6.6-percent increase is expected, resulting in an average production rate of 5.6 million bbl/d for the year.

Total U.S. petroleum product consumption declined by 77,000 bbl/d, or 0.4 percent, in 2005. Higher prices and the impact of hurricanes on liquefied petroleum gases and petrochemical feedstocks drove this decline in consumption. In 2006 and 2007, petroleum consumption is projected to increase by 0.9 percent and 2.1 percent, respectively. Motor gasoline consumption, which exhibited almost no growth in 2005, is projected to grow 0.9 percent in 2006 and 1.3 percent in 2007. This pattern reflects the anticipation of continued economic growth and the stabilization of motor gasoline prices. Distillate (diesel fuel and heating oil) consumption, having increased 1.3 percent in 2005, is projected to increase 2.4 percent in 2006 and 3.1 percent in 2007. Transportation diesel fuel consumption is projected to show solid growth in 2006 and 2007 of 3.4 percent per year as the economy continues to expand. However, this year’s unusually warm weather during the first quarter resulted in a substantial decline in heating oil demand from year-ago levels, which, given NOAA’s heating degree-day outlook for this fall and winter, will limit total distillate consumption growth for all of 2006.

Refinery inputs of crude oil through the first 5 months of 2006 have averaged nearly 470,000 bbl/d (3.0 percent) below the same period last year. There are several reasons for this decline. Several refineries were still shut down or operated at reduced rates because of hurricane damage. Others pursued maintenance schedules that had been deferred from last fall, while others installed equipment to meet the new Tier 2 gasoline and ultra-low-sulfur-diesel regulations. The lower crude runs had the greatest impact on motor gasoline and distillate inventories, which fell by 23 and 20 million barrels, respectively, from the end of February through the end of April. Inventories did rebound in May, with total primary motor gasoline stocks ending May at less than 2 million barrels below the last 5-year average and distillate stocks 8 million barrels above the last 5-year average.

While significant supply uncertainties remain, some softening in the near-term gasoline balance is expected to dampen retail prices somewhat, barring new, unanticipated supply disruptions. The potential for midsummer retightening exists, however, if demand growth picks up to higher rates than currently expected or if refinery outages occur at unusual rates. Retail regular gasoline prices are projected to average about $2.60 per gallon in 2006 and 2007. Summer 2006 (April 1 to September 30) regular gasoline pump prices are expected to average $2.76 per gallon, 39 cents higher than last year’s average of $2.37 per gallon.

The transition to ultra-low-sulfur diesel (ULSD) fuel is beginning. Refiners and importers must ensure that at least 80 percent of the volume of highway diesel fuel they supply meets the new 15 parts per million (ppm) maximum sulfur limit this year, down from 500 ppm. Terminals will have until September 1, 2006, and retailers will have until October 15, 2006, to complete their transitions to ULSD. Summer 2006 retail diesel fuel prices are expected to average $2.79 per gallon, 38 cents higher than last year’s average of $2.41 per gallon.

Natural Gas Markets

In 2006, total U.S. natural gas consumption is projected to fall below 2005 levels by about 0.2 trillion cubic feet (tcf), or 0.9 percent, then increase by 0.8 tcf, or 3.8 percent, in 2007. With weak electric heating load due to the warm January and weaker expected cooling load this summer compared to 2005, the consumption of natural gas for generation of electricity is expected to increase only slightly by 0.3 percent in 2006, then increase by 0.7 percent in 2007. Also, because of an exceptionally warm January this year, residential consumption is projected to fall by 6.0 percent from 2005 levels in 2006 and then increase by 7.7 percent in 2007. Recovery in natural-gas-intensive industrial output following the 2005 hurricanes will likely contribute to growth in industrial natural gas consumption this year (2.2 percent) and in 2007 (3.6 percent).

Domestic dry natural gas production in 2005 declined by 2.7 percent, largely because of hurricane-induced infrastructure disruptions in the Gulf of Mexico. Dry natural gas production is projected to increase by 0.7 percent in 2006 and 1.2 percent in 2007. Total liquefied natural gas (LNG) net imports are expected to increase from their 2005 level of 631 billion cubic feet (bcf) to 710 bcf in 2006 and 950 bcf in 2007.

On May 26, 2006, working natural gas in storage stood at an estimated 2,243 bcf. Stocks are 477 bcf above 1 year ago and 706 bcf above the last 5-year average. The unexpectedly warm winter weather accounts for much of the current high storage level. Spot Henry Hub natural gas prices, which averaged $8.86 per mcf in 2005, are expected to fall to an average of less than $7.00 per mcf over the next few months (down from an average of $13.44 per mcf in December). Thus, barring extreme weather conditions for the rest of the year, we expect a decline in the annual average Henry Hub spot price to about $7.74 per mcf for 2006. The respite is expected to be short-lived. Concerns about potential future supply tightness and continuing pressure from high oil market prices will likely drive spot natural gas prices to just over $10.00 per mcf this coming December and January. The Henry Hub price is expected to average $8.81 per mcf in 2007.

Electricity Markets

Electricity consumption is expected to increase only slightly during 2006 (0.8 percent) in response to weak heating-related demand this past January and the lower expected cooling-related demand this summer, compared to 2005. Electricity consumption is projected to grow about 2.1 percent in 2007.

Residential electricity prices rose an estimated 5.0 percent nationally in 2005. Some of the fastest increases in household electricity prices occurred in the Northeast and North Central regions. Sharply higher prices for peaking fuels and very high summer demand for those fuels, particularly natural gas, contributed to these increases. Additional increases in delivered residential prices are likely in many regions in 2006 and 2007.

Hydroelectric generation, particularly in the Pacific region (which accounts for approximately 50 percent of hydropower), is expected to increase by nearly 10 percent from last year. May 1, 2006 estimates of snowpack in the Pacific region are significantly above the normal range with California at 180 percent of normal, Oregon at 129 percent and Washington at 122 percent.

Coal Markets

Electric power sector consumption of coal is projected to grow by about 0.7 percent in 2006 and increase by 2.2 percent in 2007. Power sector demand for coal continues to increase in response to high natural gas and oil prices. U.S. coal production is expected to grow by 2.1 percent in 2006 and by 0.2 percent in 2007. The price of coal to the electric power sector is projected to rise throughout the forecast period, although at a slower rate than in 2005. In the electric power sector, coal prices are projected to rise by an average of 6.4 percent in 2006 and by an additional 1.7 percent in 2007, increasing from $1.54 per million Btu in 2005 to $1.66 per million Btu in 2007.

This forecast has been reprinted with permission from the DOE. For expanded information, contact Tancred Lidderdale at tancred.lidderdale@eia.doe.gov or Neil Gamson at neil.gamson@ eia.doe.gov. Or, visit the EIA website at www.eia.doe.gov/steo.