Global Crude Oil Prices
Brent crude oil spot prices increased by $3/b in April to a monthly average of $42/b, which was the highest monthly average for Brent so far this year. This was the third consecutive increase in the monthly average Brent price, the longest such stretch since April-June 2014. Several factors put upward pressure on crude oil prices in April: improving economic data and related indications that global oil demand growth is accelerating; ongoing declines in the U.S. rig count and crude oil production; and growing oil supply outages.
Despite the recent increase in prices, EIA expects global oil inventory builds to average 0.9 million b/d in the second and third quarters of 2016, limiting upward price pressures in the coming months. Brent prices are expected to average $42/b in the second and third quarters of 2016, before rising to $44/b in the fourth quarter as a result of slowing global oil inventory growth.
EIA expects global oil inventory draws to begin in the third quarter of 2017. The expected inventory draws contribute to forecast rising prices in the first half of 2017, with price increases expected to accelerate later in 2017. Brent prices are forecast to average $51/b in 2017, $10/b higher than forecast in last month's STEO. Forecast Brent prices reach an average of $57/b in the fourth quarter of 2017, reflecting the potential for more significant inventory draws beyond the forecast period.
The higher oil price forecast in this month's STEO compared with the April STEO largely reflects tighter market balances, particularly for the second half of 2017, based on a stronger outlook for global oil consumption. Higher oil consumption data in non-OECD Asia, supported by economic data, contributed to upward revisions for global oil consumption growth of 0.3 million b/d and 0.2 million b/d in 2016 and 2017, respectively. Previously, the pace of economic growth and related oil demand growth had been considered one of the main downside risks to oil prices in the forecast period, and although economic risks remain, they are lower than previously assumed.
In addition, a recent increase in global oil supply outages has taken pressure off storage capacity in the near term. These supply reductions were reflected in a narrowing differential for oil prices for near-term delivery compared with prices for delivery further in the future. Increased outages have reduced the possibility that inventory growth will cause storage costs to quickly rise and put downward pressure on oil prices.
Forecast West Texas Intermediate (WTI) crude oil prices average slightly less than Brent crude oil in 2016 and the same as the Brent price in 2017. The relative price parity of WTI with Brent in the forecast period is based on the assumption of competition between the two crudes in the U.S. Gulf Coast refinery market, as transportation price differentials to move the crudes from their respective pricing points to that market are similar.
The current values of futures and options contracts highlight the heightened volatility and high uncertainty in the oil price outlook (Market Prices and Uncertainty Report). WTI futures contracts for August 2016 delivery that were traded during the five-day period ending May 5 averaged $46/b, and implied volatility averaged 41%. These levels established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in August 2016 at $32/b and $65/b, respectively. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $26/b and $83/b for prices in December 2016. At this time last year, WTI for August 2015 delivery averaged $61/b, and implied volatility averaged 33%, with the corresponding lower and upper limits of the 95% confidence interval at $46/b and $81/b.
Petroleum Product Prices
EIA expects the retail price of regular-grade gasoline will average $2.21/gal during the 2016 summer driving season (April through September), 17 cents/gal higher than forecast in last month's STEO, but 42 cents/gal lower than the price in summer 2015. Higher forecast prices compared with the April STEO reflect higher forecast crude oil prices and higher gasoline demand during the summer. The projected monthly average retail price of gasoline increases from $2.11/gal in April to a peak of $2.28/gal in June before falling to $2.12/gal in September.
The U.S. regular gasoline retail price, which averaged $2.43/gal in 2015, is projected to average $2.08/gal in 2016, which is 14 cents/gal higher than projected in last month's STEO. U.S. regular gasoline retail prices are forecast to average $2.24/gal in 2017.
In 2015, higher gasoline demand in the United States and abroad contributed to wholesale gasoline margins significantly above five-year average levels. Strong gasoline demand, along withchanges in the U.S. vehicle fleet in response to fuel economy standards, led to higher prices for high-octane gasoline blending components, which also contributed to the above-average gasoline margins for most of 2015. Continuing demand growth and many of the same conditions that tightened octane markets and led to high wholesale gasoline margins in 2015 still exist. EIA expects refinery runs and gasoline production to be higher in summer 2016 compared with last summer, which should contribute to wholesale gasoline margins that are lower than last summer. However, EIA forecasts gasoline margins will still be higher than the five-year average level. Additionally, any unplanned refinery outages or unexpected growth in demand could result in margins increasing above their forecast levels.
The diesel fuel retail price, which averaged $2.71/gal in 2015, is forecast to average $2.27/gal in 2016 and $2.64/gal in 2017, which is 16 cents/gal and 31 cents/gal higher than in last month's STEO, respectively. Higher diesel prices in this month's STEO reflect higher forecast crude oil prices.
Natural Gas Prices
The Henry Hub natural gas spot price averaged $1.92/million British thermal units (MMBtu) in April, an increase of 19 cents/MMBtu from the March price. Through the 2015-16 winter, prices remained relatively low because of lower demand as a result of warmer-than-normal temperatures, record inventory levels, and production growth. EIA expects prices will gradually rise through the summer, as demand from the electric power sector increases, but forecast prices remain lower than they were last summer. Monthly average Henry Hub spot prices are forecast to remain lower than $3.00/MMBtu through December 2016. Forecast Henry Hub natural gas prices average $2.25/MMBtu in 2016 and $3.02/MMBtu in 2017.
Natural gas futures contracts for August 2016 delivery that were traded during the five-day period ending May 5 averaged $2.36/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for August 2016 contracts at $1.64/MMBtu and $3.39/MMBtu, respectively. In early May 2015, the natural gas futures contract for August 2015 delivery averaged $2.85/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $1.98/MMBtu and $4.11/MMBtu.
EIA estimates the delivered coal price averaged $2.23/MMBtu in 2015. Forecast prices are $2.18/MMBtu in 2016 and $2.21/MMBtu in 2017.
Electricity Retail Prices
EIA expects the U.S. average retail price of electricity for the residential sector in May will average 12.9 cents per kilowatthour (kWh), with 18.5 cents/kWh in New England as the highest price and 11.1 cents/kWh in the East South Central region as the lowest price. The U.S. residential electricity price averaged 12.7 cents/kWh in 2015 and is expected to fall by 0.7% to 12.6 cents/kWh in 2016 and then rise 2.4% to 12.9 cents/kWh in 2017.