Fuel prices, demand expected to be higher this summer

Petroleum products demand is expected to rise for the summer driving season as the impacts of COVID-19 decline in the United States, according to the U.S. Energy Information Administration (EIA). The increased demand for gasoline and diesel amid higher crude oil prices is expected to contribute to higher fuel prices this summer, from last summer.

The EIA’s Short-Term Energy Outlook released Tuesday (April 6) showed U.S. highway travel is expected to rise by 15% this summer, from last summer, but the travel will be less than in the summer of 2019. Meanwhile, international benchmark Brent crude oil prices are expected to be 78% higher this summer at an average of $64 per barrel, compared to the $36 per barrel average last summer.

The retail price of regular-grade gasoline in the United States is expected to be an average of $2.78 per gallon this summer, compared to $2.07 per gallon last summer. For diesel fuel, the prices are projected to be an average of $2.91 per gallon this summer, from $2.43 per gallon last summer.

“The increase in fuel consumption we are forecasting for the summer driving season is a reflection of optimism about the U.S. economy as COVID-19 vaccinations and fiscal stimulus support continued recovery,” said EIA Acting Administrator Stephen Nalley. “There remains a lot of uncertainty, but rising levels of employment, disposable income and consumer spending point to an improving U.S. economy.”

EIA based its outlook on the macroeconomic model from IHS Markit from which EIA assumes U.S. GDP growth will be 8.5% higher this summer, compared to last summer. For 2021, GDP is expected to rise by 5.6%. It’s projected to rise by 4.2% in 2022.

“EIA believes that households in the United States will increase their spending on motor gasoline by about 31% this summer due to increased travel as the pandemic subsides and higher gasoline prices,” Nalley said. “Still, households could see a wide range of increased expenditures, depending on employment levels, work-from-home policies and other factors.”

Retail gasoline prices recently rose to the highest levels in nearly two years, reaching an average of $2.87 per gallon on March 22. The rise in U.S. refinery production along with rising crude oil supply from the Organization of the Petroleum Exporting Countries (OPEC), its partner countries and U.S. tight oil producers should help to reduce the prices. Retail gasoline prices are expected to fall gradually to an average of $2.62 per gallon by September. Brent crude oil prices are projected to be an average of $65 per barrel in the second quarter, $61 per barrel in the second half of 2021 and $60 per barrel in 2022.

U.S. gasoline consumption is expected to rise to an average of 8.6 million barrels per day in 2021, up from 8 million barrels per day in 2020, but down from 9.3 million barrels per day in 2019.

“During the summer of 2020, consumers in the United States used the least distillate fuel (which includes diesel fuel and heating oil) since 2009,” Nalley said. “EIA expects that U.S. consumption of distillate fuel will increase by 11% this summer, nearly returning to the 2019 level.”

Global consumption of petroleum and liquid fuels is expected to rise by 5.5 million barrels per day to an average of 97.7 million barrels per day in 2021. Consumption is projected to rise by 3.7 million barrels per day in 2022 to an average of 101.3 million barrels per day. The consumption growth is higher than previously projected. The new projection can be attributed to higher global GDP growth forecasts from Oxford Economics, which increased 0.4 percentage points from the March outlook to 6.2% for 2021.

U.S. domestic crude oil production is expected to be an average of 10.9 million barrels per day in the second quarter of 2021 and rise to nearly 11.4 million barrels per day by the fourth quarter of 2021. U.S. crude oil production is projected to be 11.9 million barrels per day in 2022. The expected rise in U.S. crude oil production can be attributed to the expectation that West Texas Intermediate crude oil prices will remain more than $55 per barrel through the forecast period.

NATURAL GAS
The U.S. benchmark Henry Hub natural gas spot price is expected to be an average of $2.73 per million British thermal units in the second quarter and $3.04 per million British thermal units for 2021, up from the 2020 average of $2.03 per million British thermal units. The price is projected to rise to $3.11 per million British thermal units in 2022.

“EIA expects that consumption of natural gas will decrease in the United States in 2021 by less than 1%,” Nalley said. “Although we expect that natural gas consumption in residences, by commercial establishments, and by industry will all increase, the slight decrease in overall consumption in 2021 is the result of less consumption used to generate power because of higher natural gas prices.”

The higher prices are expected to make coal more competitive as a fuel in the power sector, Nalley said. As a result, coal use is projected to rise.

“EIA forecasts that coal production will increase by 9% in the United States in 2021 and by 3% in 2022,” Nalley said. “This forecast increase is a result of our expectation of a 13% rise in coal use for power generation in 2021 and a further 4% increase in 2022.”

U.S. electricity consumption is expected to rise by 2.1% in 2021. The rise can be attributed to colder temperatures in the first quarter of the year and expectations of continuing economic growth, Nalley said.

“EIA expects the fuel mix for the U.S. power sector to shift in 2021,” he said. “Our April STEO forecasts that natural gas will fuel about 36% of utility-scale electricity generation, which is down 3% from 2020. Coal’s share of power generation increases from 20% in 2020 to 22% in 2021, while generation from renewables increases from 20% to 21%. We expect the nuclear share of U.S. generation to decline from 21% to 20% over the same period.

“In 2021, we forecast energy-related CO2 emissions will increase by about 5% as economic activity increases and coal accounts for a larger share of the electric generation market, displacing higher-priced natural gas,” Nalley added. “We also expect energy-related CO2 emissions to rise in 2022 but by a slower rate of 2%.”