Crude Prices Forecast to Decline for Rest of Year

The U.S. Energy Information Administration (EIA) today released its latest update to the agency’s Short-Term Energy Outlook. The update includes a number of changes:

• Crude oil prices are forecast to decline in the last four months of the year, with Brent falling from an average of $117 a barrel at the end of August to $111 a barrel to an average of $103 a barrel for 2013 and WTI to average $93 a barrel in 2013.
• Gasoline prices are now forecast to average $3.58 a gallon in the fourth quarter, down from $3.66 a gallon in the third quarter. Gasoline is expected to average $3.43 a gallon in 2013.
• U.S. crude oil production is forecast to average 6.3 million barrels a day in 2012, up 700,000 barrels a day from the 2011 average. Production is expected to rise to 6.8 million barrels a day in 2013.
• Fuel-switching from coal to natural gas for electricity generation has peaked and the EIA expects the trend to reverse in 2013. The agency expects natural gas-fired generation to decline by 10% in 2013, while coal fired-generation is expected to rise by 9%.

Interestingly, the OPEC report which came out earlier today projected U.S. crude production of 9.74 million barrels a day in 2012. The substantial difference is due to what gets counted. OPEC adds liquids and ethanol to its total while the EIA counts these and other liquids separately.

The good news here is that gasoline prices are forecast to fall beginning later this month and to remain below $3.50 a gallon in 2013. And while increased production plays some role in the decline, the drop is mostly due to the weak economic forecast for next year.

The United States Natural Gas ETF (NYSEMKT: UNG) is up about 5.5% at $20.09 today in a 52-week range of $14.25 to $41.12.

The United States Oil Fund (NYSEMKT: USO) is up about 0.7% at $36.09 in a 52-week range of $29.02 to $42.30.

The United States Gasoline Fund (NYSEMKT: UGA) is up 0.3% at $61.38 in a 52-week range of $44.65 to $61.53.

Paul Ausick