Gasoline Prices Increasing as Crude Oil Production Decreases

The U.S. Energy Information Administration (EIA) just released its short-term energy outlook (STEO) on May 10, noting that North Sea Brent crude oil prices averaged $42/bbl in April, a $3 per barrel increase from March.  Improving economic data, growing supply disruptions, and falling U.S. crude oil production and rig counts contributed to the price increase.

Low rig count masks unprecedented oil & gas production.

Brent crude oil prices are forecast to average $41/bbl in 2016 and $51/bbl in 2017, $6/bbl and $10/bbl higher than forecast in last month’s STEO, respectively. West Texas Intermediate (WTI) crude oil prices are forecast to average slightly less than Brent in 2016 and to be the same as Brent in 2017. However, the current values of futures and options contracts suggest high uncertainty in the price outlook. For example, EIA’s forecast for the average WTI price in August 2016 of $42/bbl should be considered in the context of Nymex contract values for August 2016 delivery. These contracts traded during the five-day period ending May 5 suggest the market expects WTI prices to range from $32/bbl to $65/bbl (at the 95% confidence interval) in August 2016.

During the April-through-September summer driving season of 2016, U.S. regular gasoline retail prices are forecast to average $2.21/gallon (gal), 17 cents/gal higher than forecast in last month’s STEO but 42 cents/gal lower than last summer. U.S. regular gasoline retail prices are forecast to average $2.08/gal in 2016 and $2.24/gal in 2017, 14 cents/gal higher and 24 cents/gal higher than forecast in last month’s STEO, respectively.

U.S. crude oil production averaged 9.4 million barrels per day (bpd) in 2015. Production is forecast to average 8.6 million bpd in 2016 and 8.2 million bpd in 2017. The 2017 forecast is about 0.1 million bpd higher than forecast in the April STEO. EIA estimates that crude oil production for the month of April 2016 averaged 9.0 million bpd, which is 0.1 million bpd below the March 2016 level, and 0.7 million bpd below the 9.7 million bpd level reached in April 2015.

Natural gas working inventories were 2,625 billion cubic feet (Bcf) on April 29, which was 49% higher than a year earlier, and 47% higher than the previous five-year (2011-15) average for that week. April is typically the beginning of the inventory injection season, which runs through October. EIA projects natural gas inventories will be 4,158 Bcf at the end of October 2016, which would be the highest end-of-October level on record. Henry Hub spot prices are forecast to average $2.25/MMBtu in 2016 and $3.02/MMBtu in 2017, compared with an average of $2.63/MMBtu in 2015.