Financial Outlook

WASHINGTON–U.S. crude oil production reached an estimated 8.5 million barrels a day in July, the U.S. Energy Information Administration reports in its Short-Term Energy Outlook for August. That was the highest monthly crude production level since April 1987, EIA says, adding that it expects U.S. oil production, which averaged 7.5 MMbbl/d in 2013, to average 8.5 MMbbl/d in 2014 and 9.3 MMbbl/d in 2015.

Meanwhile, EIA says it expects marketed natural gas production to grow at an annual rate of 5.3 percent this year and by another 2.1 percent in 2015. The August Outlook projects that strong increases in the lower-48 states will offset Gulf of Mexico declines. As of May, the most recent month for which data are available, EIA reports marketed gas production was more than 4.0 billion cubic feet a day greater than it was in May 2013.

EIA points out that its 2015 forecast represents the highest annual average level of oil production since 1972. It notes the highest previous annual average U.S. production level was 9.6 MMbbl/d in 1970.

The agency says oil production from the Gulf of Mexico is expected to increase from 1.25 MMbbl/d last year to 1.44 MMbbl/d this year, with 11 projects coming on line. Six projects began production in the first half of 2014: Na Kika Phase 3, Mars B, Dalmatian, Entrada, Atlantis Phase 2, and Tubular Bells. EIA says additional wells are expected to begin producing in the fourth quarter from the Cardamom Deep, South Deimos/West Boreas, Hadrian South, Jack/St. Malo, and Lucius projects.

Natural Gas

The August Outlook raises the projection for total marketed natural gas production in 2014 by 800 million cubic feet a day to 73.9 billion cubic feet a day. It notes the EIA 914 production survey indicates strong growth in the lower-48 states through May, while additional preliminary data sources indicate continued gains in production in June and July. Increases come largely from the Marcellus states and Texas.

EIA mentions that rapid production growth in the Marcellus Shale has contributed to lower natural gas prices in the Northeast. As a result, new infrastructure has been proposed to take gas to other regions. In June, the agency notes, the eastward-flowing Rockies Express Pipeline began service on its Seneca Lateral, which will take Marcellus gas to the Midwest.

EIA says REX’s parent company, Tallgrass Energy, plans to add bidirectional capability on a significant portion of REX’s easternmost segment.

Meanwhile, growing domestic gas production is expected to continue to put downward pressure on natural gas imports from Canada and increase exports to Mexico. As a result, EIA projects net imports will decline to 3.3 Bcf/d in 2014 and to 2.6 Bcf/d in 2015.

The agency notes liquefied natural gas imports have fallen over the past several years because higher prices in Europe and Asia are more attractive to sellers than the relatively low prices in the United States. It predicts Cheniere Energy’s Sabine Pass facility, which is scheduled to come on line in stages beginning late next year, will be the first to export U.S. LNG.

Crude Oil: EIA’s 2015 forecast represents the highest

annual average level of oil production since 1972.

EIA says it expects total U.S. natural gas consumption will average 72.6 Bcf/d this year, an increase of 1.7 percent from 2013, led by the industrial sector. In 2015, the agency says, total natural gas consumption is expected to increase by 400 million cubic feet a day as continued industrial sector growth offsets lower residential and commercial consumption.

Higher natural gas prices this year have contributed to an anticipated 2.2 percent decline in gas consumption in the power sector, to 21.8 Bcf/d. EIA says it expects power sector gas consumption to increase to 22.7 Bcf/d in 2015 with lower natural gas prices and the retirement of some coal plants.

The August Outlook projects power-sector natural gas prices will hover around $4.60 an MMBtu for the next few months. “However,” the report reflects, “these prices still are higher than last year, leading to a slight decline in the natural gas share of generation to 28.0 percent during the second half of 2014 from 28.7 percent during the same period last year. The share of generation fueled by coal during the second half rises from 39.2 percent in 2013 to 40.6 percent this year in response to declines in natural gas and nuclear generation.”

EIA projects total U.S. electricity generation will grow 1.1 percent this year to an average of 11,200 gigawatt-hours a day.

U.S. Petroleum

EIA reports total U.S. liquid fuels consumption rose by 400,000 bbl/d (2.1 percent) in 2013. It says consumption of hydrocarbon gas liquids (HGL) registered the largest gain, increasing by 150,000 bbl/d (6.4 percent).

EIA notes motor gasoline consumption grew by 90,000 bbl/d (1.1 percent) last year, which was the largest annual increase since 2006. Motor gasoline consumption grows by 40,000 bbl/d this year and then falls by 10,000 bbl/d next year as improving fuel economy in new vehicles increasingly offsets rising highway travel, according to the August Outlook.

EIA predicts distillate fuel consumption will increase 140,000 bbl/d this year and 70,000 bbl/d next year after growing 90,000 bbl/d last year, reflecting colder weather and economic growth.

HGL consumption increased by 150,000 bbl/d in 2013, led by a 90,000 bbl/d increase in propane demand, which EIA says was unusually high because of strong petrochemical demand in the first half of the year, followed by high crop-drying demand and cold weather late in the year.

EIA projects a 60,000 bbl/d decline in HGL consumption this year, with propane consumption returning to 2012 levels as higher prices reduce the use of propane as a petrochemical feedstock. HGL consumption is projected to increase again by 100,000 bbl/d in 2015 as new propane dehydrogenation units come on line.

EIA says U.S. HGL production at natural gas liquids plants is projected to increase from 2.6 MMbbl/d in 2013 to 3.1 MMbbl/d in 2015. About half of this growth is expected to come from ethane production to meet growing demand associated with expanding domestic ethylene production and export capacity.

The agency notes the growth in domestic production has contributed to a significant decline in petroleum imports. The share of total U.S. liquid fuels consumption met by net imports fell from 60 percent in 2005 to an average of 33 percent in 2013. EIA says it expects the net import share to decline to 22 percent in 2015, which would be the lowest level since 1970.

Global Petroleum

EIA says its world oil balance is virtually unchanged from the July Short-Term Energy Outlook. The agency still expects the balance to remain relatively tight, with surplus crude oil production capacity averaging 2.1 MMbbl/d this year and 2.7 MMbbl/d next year.

EIA projects world petroleum and other liquids supply will increase by 1.5 MMbbl/d this year and by another 1.3 MMbbl/d in 2015, with most of the growth coming from countries outside of the Organization of the Petroleum Exporting Countries.

Forecast non-OPEC supply grows by 1.8 MMbbl/d this year and by 1.1 MMbbl/d in 2015. EIA says the United States and Canada account for much of this growth.

The agency estimates global petroleum consumption grew by 1.3 MMbbl/d (1.4 percent) in 2013, averaging 90.4 MMbbl/d for the year. The August Outlook projects global consumption will grow by 1.1 MMbbl/d this year and by 1.4 MMbbl/d in 2015.

Natural Gas: According to the agency, U.S. natural

gas consumption will average 72.6 Bcf/d this year.

In 2015, total gas consumption is expected to

increase another 400 million cubic feet a day.

Countries outside the Organization for Economic Cooperation and Development account for nearly all the expected consumption growth. EIA says China is the leading contributor with consumption rising by 370,000 bbl/d in 2014 and 430,000 bbl/d in 2015.

EIA says it expects a 180,000 bbl/d decline in OECD petroleum consumption this year, led by declines in both Japan and Europe. Another 30,000 bbl/d decline in OECD Europe consumption for 2015 represents a downward revision from the 60,000 bbl/d increase projected in July’s Short-Term Energy Outlook,

EIA estimates non-OPEC liquids production grew by 1.3 MMbbl/d in 2013, averaging 54.0 MMbbl/d for the year. The agency says it expects non-OPEC liquids production to grow by 1.8 MMbbl/d in 2014 and by 1.1 MMbbl/d in 2015. It forecasts production from the United States and Canada will grow by a combined ann­ual average of 1.6 MMbbl/d this year and by 1.1 MMbbl/d in 2015.

EIA estimates OPEC crude oil production averaged 29.9 MMbbl/d last year, a decline of 1.0 MMbbl/d from 2012, primarily reflecting increased outages in Libya, Nigeria and Iraq, along with strong non-OPEC supply growth. The agency says it expects OPEC crude oil production to fall another 300,000 bbl/d this year and by 100,000 bbl/d in 2015 to accommodate growing production in non-OPEC countries.

EIA says it expects OPEC’s surplus crude oil production capacity to average 2.1 MMbbl/d this year and 2.7 MMbbl/d next year. It points out those estimates do not include additional capacity that may be available in Iran but is off line because of the U.S. and European Union sanctions on Iran.

Prices

EIA speculates the market’s perception of reduced risk to Iraqi oil exports and news regarding increasing Libyan exports contributed to a drop in the Brent crude oil spot price to an average of $107 a barrel in July, $5 a barrel lower than the June average.

West Texas Intermediate prices fell from an average of $106 a barrel in June to $104 in July, despite record levels of U.S. demand, the agency says. “Driven in part by the relocation of crude oil to refining centers along the Gulf Coast through new pipelines, crude oil inventories at the Cushing, Ok., storage hub have fallen by more than half since early this year, from nearly 42 million barrels on Jan. 24 to below 18 million barrels on July 25, the lowest level since October 2008,” the August Outlook observes.

EIA projects Brent crude oil prices will average $107 a barrel over the second half of this year and $105 a barrel in 2015. The discount of WTI to Brent averaged more than $13 a barrel from November through January. But EIA says record high refinery runs contributed to the WTI discount falling to $3 a barrel in July, which was the same level seen in July 2013, when refinery runs were similarly at their seasonal peak. The agency says it now expects WTI’s discount to Brent will average $7 a barrel for the second half of this year and $9 a barrel in 2015, which it points out are reductions of $2 and $1 a barrel, respectively, from its July Outlook.

Natural gas spot prices fell from $4.47 an MMBtu at the beginning of July to $3.78 an MMBtu at the end of the month as natural gas stock builds continued to outpace historical norms. EIA reports natural gas working inventories on Aug.1 totaled 2.39 trillion cubic feet, 540 Bcf, or 18 percent, below the level at the same time a year ago and 610 Bcf (20 percent) below the five-year average.

Natural Gas Liquids: Total liquid fuels consumption

is projected to grow by 90,000 bbl/d in 2015, with

HGL consumption increasing by 100,000 bbl/d.

The agency projects natural gas working inventories will reach 3.46 Tcf at the end of October, which is 350 Bcf below last year’s level.

The August Outlook predicts the Henry Hub natural gas spot price, which averaged $3.73 an MMBtu in 2013, will average $4.46 an MMBtu in 2014 and $4.00 an MMBtu in 2015, which is $0.31 and $0.51 an MMBtu lower than EIA projected in its June and July Short-Term Energy Outlooks, respectively.

Economic Indicators

EIA notes that U.S. economic growth slowed in the first quarter this year, but improved substantially in the second. The U.S. Bureau of Economic Analysis reports second quarter real gross domestic product grew at an annualized rate of 4.0 percent from the first quarter.

Second-quarter growth was associated with increases in private inventory investment and exports, along with greater state and local government spending and higher nonresidential fixed investment, EIA indicates.

It says employment indicators remain positive: the U.S. Bureau of Labor Statistics (BLS) reported the four-week moving average of initial unemployment insurance claims for the week ending Aug. 2 was the lowest since February 2006 at 293,500. According to BLS, the U.S. economy added 209,000 jobs in July, and the unemployment rate stood at 6.2 percent.

New orders for durable goods rose 0.7 percent in June, according to the U.S. Census Bureau, compared with a 1.0 percent decrease reported in May. Census also reported that sales of new single-family homes fell 8.1 percent from May to June, to a level 11.5 percent below the June 2013 estimate.

EIA says forecast real GDP growth on which its August Outlook is based reaches 1.7 percent in 2014 and accelerates to 2.8 percent in 2015, which the agency says is less than the 2.2 and 2.9 percent forecasts it used for the July Outlook. “The decrease reflects the downward revision to real GDP growth in the first quarter of 2014, and less optimism about fixed investment in 2015,” EIA explains. “Consumption in 2015 is forecast to be slightly lower as well because real disposable income grows by 2.8 percent, down from the 3.1 percent forecast in July.”

EIA adds that real disposable income projections in the August Outlook grow 1.9 percent this year, and total industrial production grows 4.0 percent this year and another 2.9 percent in 2015. Growth in industrial production in the manufacturing sector is lower than total industrial production in 2014, at 3.6 percent, but jumps higher in 2015 to 3.4 percent, it adds.