American Oil and Gas Reporter - December 2016 - 48

SpecialReport: Natural Gas White Papers
FIGURE 3
Historical and Projected WTI Crude Oil Prices
140
120

$/bbl

100
80

Historical spot price
EIA price forecast
NYMEX futures price
95% NYMEX futures upper conﬁdence interval
95% NYMEX futures lower conﬁdence interval

60
40
20
0
Jan 2015

Jul 2015

Jan 2016

Jul 2016

Jan 2017

Jul 2017

Note: Conﬁdence intervals based on options market for ﬁve trading days ending Nov.3.

48 THE AMERICAN OIL & GAS REPORTER

in the Midwest, contributing to comparatively large inventory draws in the region,"
EIA states. "In October, Midwest crude
oil inventories outside Cushing dipped
below year-ago levels for the first time
since August 2014, likely providing support to near-term WTI prices."
However, EIA reported large U.S. inventory builds in the last week of October
and again in early November, including increased imports into the United States.
"These movements could signal a rebalancing
between domestic and international markets
in the near future," the agency suggests.
Electricity
Among U.S. households, 39 percent
rely on electricity as the primary heating
source, including 63 percent of all households in the South. EIA notes that power
generation fueled by natural gas reached
record levels last summer, and for the first
six months of 2016, natural gas supplied
36 percent of total U.S. electricity generation
versus 31 percent for coal. Figure 4 shows
projected summer 2017 cooling degree
days based on NOAA forecast data. The
FIGURE 4

Historical and Projected Summer Cooling Degree Days
400
350
Population-weighted

and any deviation in prices from forecast
levels would cause a similar deviation in
retail heating oil prices and consumer
expenditures," the agency reminds, while
noting that high heating oil inventories
in the Northeast region should limit price
volatility, even in the event of colderthan expected temperatures.
Relatively high refinery output of distillate fuel, combined with last winter's
near-record warmth, resulted in distillate
stocks totaling 52.3 million barrels in the
Northeast at the end of September, which
was nearly 7 million barrels higher than
in September 2015, EIA reports.
Looking at the larger U.S. oil market
picture, EIA's analysis forecasts West
Texas Intermediate prices averaging
$50/bbl in 2017. Figure 3 shows actual
and projected WTI prices from January
2015 through July 2017, with confidence
intervals derived from options market data
for the five trading days ending Nov. 3.
EIA says total domestic output fell
600,000 bbl/d in 2016 to an average 8.8
million barrels a day, and projects that
production will average 8.7 MMbbl/d in
2017. New production from increased
drilling in the Permian Basin-the only
region with growing production in October
and November-is expected to partially
offset declines in other lower-48 regions
in 2017, according to the agency.
Total U.S. oil inventories are expected
to decline through the first quarter of
2017, but global inventory is forecast to
build through the first half of the year.
Higher near-term prices reflected a counter-seasonal decline in total U.S. oil inventories and a decline in inventories at
Cushing, Ok., in September and October,
EIA reports.
"October refinery runs were 265,000
bbl/d higher than the five-year average

horizontal lines again indicate each month's
prior 10-year average.
However, with higher forecast natural
gas prices, EIA foresees the share of generation from natural gas experiencing yearover-year declines. Based on expected
temperatures and market conditions, EIA
says coal will surpass natural gas in electricity generation in the heart of the winter
heating months of December, January and
February. For full-year 2017, the agency
anticipates natural gas accounting for 33
percent of total electricity generation.
EIA data indicate that the generation
cost of natural gas averaged $21.30 per
megawatt-hour in August, nearly identical
to the cost of coal. However, it says the
cost of natural gas delivered to electric
generators, including both spot market
and contract purchases, generally has
been increasing, and the agency says it
expects average natural gas generation
cost to reach a seasonal peak of $31 per
megawatt-hour in February. That would
be about 40 percent higher than the projected cost of coal on a national average
basis.
"The higher relative costs of natural
gas are likely to encourage the industry
to use more coal to fuel electricity generation," EIA says. "Forecast colder winter
temperatures, especially in areas where
coal is dominant, also contribute to higher
projected coal use in power generation."
EIA notes that natural gas now supplies
50 percent of New England's total regional
power generation, and that the increased
reliance can put fuel supplies in competition with natural gas used for space
heating during cold spells. Consequently,
New England winter-time electricity prices
on the wholesale market generally have
tended to be higher than at other times of
the year, with occasional price spikes. ❒

300

2014
2015
2016

250

2017

200
150
100
50
0
April

May

June

July

August

Note: EIA calculations based on NOAA's 14-16 month outlook. Horizontal lines = 10-year average.

September

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