Diesel projected at an average price of $2.88 through 2010; trucking will benefit

AMID THE dire news of layoffs and bankruptcies, there is a ray of sunshine: The projected average retail price for diesel fuel is $2.47 per gallon for 2009 and $2.88 for 2010, according to the Energy Information Administration's (EIA) “Short-Term Energy Outlook.”

The 41-cent increase was expected, given the anticipated economic recovery. And the price for 2010 still will be a welcome relief for the trucking industry, which was ravaged in 2008, when the all-time high of $4.76 was reached.

Brian Milne, refined fuels editor for Telvent DTN, says there could be some slight revisions, but generally the expectation is for diesel prices to increase moderately next year.

“You're talking about an average of $2.88, which suggests that diesel will climb over $3 at some point, and it's hard to disagree at this point,” Milne says. “It depends on what occurs globally in oil demand and price activity by crude oil.

“This is a very big difference from 2008. We have a major surplus of supply of distillate fuels, but mostly diesel, oil and heating oil. We are holding at exceptionally high levels — levels seen back in the 1980s. It's just an enormous amount of diesel fuel. That's actually the biggest drag on the oil complex. That huge overhang in supply is limiting further price increases.

“In 2008, truckers really got hurt. We had record-high prices, then had a vicious recession that limited interstate commerce. It took its toll on the market. The contraction in GDP (Gross Domestic Product) late last year into this year limited any real growth in demand for diesel. It's keeping a lid on prices for at least the next year.”

He says the primary driving forces will be the value of the US dollar, inflation and the economic recovery — not just in the United States, but globally.

“Right now, with crude, we are range bound — trading within a range,” he says. “It's not going higher or lower. It's been right around $70. Look at heating oil, diesel and gasoline — they are byproducts of crude oil, so this is a key cost component. Crude oil prices are impacted by the high supply of diesel, so they are interrelated. We saw crude oil increase this week (September 7-11) primarily on a weaker US dollar. Crude oil trades internationally in US denominations, so when the dollar weakens, it's cheaper for foreign buyers of crude oil. It's also used as an inflation hedge. When the dollar weakens, people buy other commodities. The weaker the dollar is, the cost of energy is going to go higher. So people think, ‘Let me get a piece of energy and help offset that risk.’

“There are different camps on inflation. There really haven't been any signs of inflation, but if it happens, you'll see the dollar weakening. Others think we'll see deflation, and crude oil prices would go lower.

“The other major factor is the recovery of the economy itself, especially in the United States but also globally. We saw prices increase in the summer months, based on the premise that the economy was doing better with the stock market climbing. That had the market thinking that we were going to start see growth in the economy. When we have growth, we use more energy.”

Natural gas is getting more attention as a commercial truck fuel. EIA projects the monthly Henry Hub natural gas spot price to average $2.32 per thousand cubic feet (Mcf) in October, the lowest monthly average spot price since September 2001. Natural gas inventories likely will set a new record high at the end of this year's injection season (October 31), reaching more than 3.8 trillion cubic feet (Tcf). The projected Henry Hub annual average spot price increases from $3.65 per Mcf in 2009 to $4.78 in 2010. However, upward price pressure next year is limited by the sensitivity of natural gas use in the electric power sector to higher natural gas prices and continued expansion of U.S. natural gas production from shale formations.

West Texas Intermediate (WTI) crude oil prices hovered in the $67-to-$74-per-barrel range in August as expectations of an economic recovery and higher oil consumption in the future were weighed against weak current demand and high inventories. As long as oil prices remain in their current range, EIA expects the Organization of the Petroleum Exporting Countries (OPEC) to maintain its existing production targets.

Preliminary data indicate that global oil consumption declined by 3 million barrels per day (bbl/d) in the second quarter of 2009 compared with year-earlier levels. Members of the Organization for Economic Cooperation and Development (OECD) accounted for most of the decline; total non-OECD consumption was virtually unchanged. The current macroeconomic outlook assumes that the world economy begins to recover at the end of this year, led by non-OECD Asia. As a result, EIA expects world oil consumption to grow in the fourth quarter of 2009 compared with year-earlier levels, the first such growth in five quarters. Projected world oil consumption grows by 0.9 million bbl/d in 2010, with relatively strong growth in non-OECD countries being partially offset by a slight decline in OECD consumption.

Based on preliminary data, OECD commercial oil inventories stood at 2.74 billion barrels at the end of the second quarter of 2009. At 61 days of forward cover, OECD commercial inventories were well above average levels for that time of year. EIA expects OECD oil inventories to remain at above-average levels throughout the forecast period because of weakness in global oil consumption and relatively high future prices compared with current prices.

EIA forecasts total consumption of liquid fuels and other petroleum products to decrease by about 800,000 bbl/d (4%) in 2009, compared with 2008. During the first half of the year, consumption declined by almost 1.25 million barrels per day (6.3%) from the same period last year, one of the steepest declines on record. The year-over-year projected decline in petroleum consumption slows to 300,000 barrels per day (1.6%) in the second half of 2009 as economic recovery begins to take hold.

Monthly average motor gasoline consumption in June showed an increase over the same month from the prior year for the first time since September 2007 and continues to grow over year-ago levels through the forecast. The modest economic recovery projected for 2010 contributes to a 260,000-bbl/d (1.4%) increase in total liquid fuels consumption, led by increases of 110,000 bbl/d (2.9%) in distillate consumption, 60,000 bbl/d (0.6%) in motor gasoline consumption, and 10,000 bbl/d (0.7%) in jet fuel consumption.

EIA projects total US crude oil production to average 5.24 million barrels per day in 2009 and increase to an average of 5.30 million bbl/d in 2010. Crude oil production from the new Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields will account for about 14% of Lower-48 crude oil production in the fourth quarter of 2010.

EIA expects the monthly average regular-grade gasoline retail price to fall from $2.62 per gallon in August and September to an average $2.56 per gallon over the last three months of the year. Higher projected crude oil prices in 2010 (about $12 per barrel, or 29 cents per gallon, higher than the 2009 average) increase regular-grade gasoline prices to an average of $2.70 per gallon next year. Projected diesel fuel retail prices, which averaged $2.63 per gallon in August, should increase over the next few months to average $2.74 during the fourth quarter of 2009 as the winter heating fuel season begins.

Total natural gas consumption will likely decline by 2.4% in 2009 and remain flat in 2010. Despite low relative prices for much of the year, industrial natural gas consumption declined by 12% in the first six months of 2009 compared with the same period last year. EIA expects this year-over-year consumption decline will continue through the second half of the year for industrial users, although the trend will be less pronounced. Conversely, EIA expects natural gas use in the electric power sector will increase by 4.3% on a year-over-year basis during the second half of 2009 as natural gas continues to compete with coal for a share of the baseload power supply at current prices.

EIA expects natural gas consumption will increase slightly in the commercial and industrial sectors in 2010 as a result of improved economic conditions and low prices. Consumption remains relatively flat in the residential and electric power sectors next year. The anticipated addition of new coal-fired generating capacity and rising natural gas prices limits the potential for significant increases beyond the forecast 2009 level in natural gas consumption by electric generators.

EIA expects total US marketed natural gas production to increase by 0.9% in 2009 and fall by 3.5% in 2010. Despite a 20% drop in prices and a 45% drop in working natural gas drilling rigs since the start of the year, total natural gas production increased slightly from January to June 2009. This current production trend reflects significant improvements in horizontal drilling technology and robust productivity from shale gas discoveries in Louisiana, Oklahoma, Arkansas, and Pennsylvania.

As US natural gas inventories swell to record-high levels, some curtailment of production is expected. The sustained reduction in drilling activity and production curtailments are projected to result in a 5.7% decline in marketed production from the Lower-48 non-Gulf of Mexico (GOM) between the first and second half of the year. The projected 1.3% increase in Federal GOM production during the second half of 2009 over the first half results from the addition of new producing wells and continued recovery from damage sustained during last year's hurricane season.

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