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Prices Decline as Sentiment About Economy Weakens Second Quarter 2012 Oil prices declined in the second quarter, with a barrel of West Texas Intermediate (WTI) selling for just below $85 in June and Brent trading near $100—both well below 2011 prices (Chart 1). WTI averaged $106 and Brent $125 in March. Retail gasoline and diesel prices also declined from levels seen in the first-quarter Energy Update. As of mid-June, the national average price for a gallon of regular-grade gasoline was $3.53, slightly below year-ago levels (Chart 2). In June, the Energy Information Administration (EIA) lowered its 2012 forecast for the national average price for regular-grade gasoline. Officials anticipate $3.56 a gallon, 23 cents less than in the March forecast. Crude oil isn’t the only commodity whose price sharply declined in recent months. A variety of metals, textiles and other industrial inputs also fell (Chart 3). The Commodity Research Bureau’s metals sub-index, measuring the prices of copper, steel, lead, tin and zinc, tumbled 7.5 percent in mid-June from the end of March. This broad commodity decline suggests price moves are not industry specific but driven by global economic concerns. Supply Rises in May Chart 1 Crude Oil Prices Down Sharply in Second Quarter Dollars per barrel 130 120 110 June 2012 estimate 100 90 80 70 Brent 2011 June 2012 estimate Brent 2012 WTI 2011 WTI 2012 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec SOURCES: Wall Street Journal, Financial Times. Chart 2 Gasoline Prices Continue to Ease in May and June Cents/gallon 450 400 The global supply of oil products increased to 91.1 million barrels per day (mb/d) in May 2012 from 90.9 mb/d in April, according to International Energy Agency (IEA) data. Liquids production from non-Organization of the Petroleum Exporting Countries (OPEC) sources accounted for the entire rise. Non-OPEC production is forecast to reach an all-time high of 54 mb/d by the fourth quarter, driven by increases in North American production. Unplanned outages, however, continue to affect non-OPEC sources, reducing secondquarter output by about 1.2 mb/d. These disruptions are expected to subside to around 1 mb/d in the second half of the year. OPEC supply declined marginally in May, down 0.2 mb/d to 31.9 mb/d. Increased output from Angola, Nigeria and Libya partially offset decreases in Saudi Arabia and Iraq. 2011 350 June 2012 estimate 300 250 2007–11 average 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec SOURCE: Energy Information Administration. IEA estimates. Some of the oil not exported likely went into onshore and offshore storage facilities. As full sanctions are imposed, the IEA estimates that Iran will have to cut actual production by about 1 mb/d in the second half of 2012 as onshore and offshore storage reaches capacity. Demand Forecasts Reduced Th IEA’s global oil demand estimate for 2012 was reduced by Imminent sanctions on Iran appear to be impacting that 0.1 mb/d in June to 89.9. Although lowered, the total is still country’s exports. Exports were about 400,000 barrels per an increase over 2011 levels by approximately 0.8 mb/d, or day lower in April than in February and March, according to 0.9 percent. Federal Reserve Bank of Dallas Quarterly Energy Update 1 demand in 2012 will be 3.6 percent higher than in 2011, lifting annual average consumption to 9.7 mb/d. Chart 3 Other Commodity Prices Decline in Second Quarter Index, Jan. 6, 2012 = 100 Crude Oil Inventories Elevated CRB metals 115 CRB raw industrials 110 CRB textiles 105 100 U.S. oil inventories are at elevated levels. Inventories typically build in April and May during spring refinery maintenance season; however, crude stocks are abnormally high (Chart 4). While crude inventories have risen significantly, product inventories have not, remaining virtually unchanged from the same period in 2011 (Chart 5). 95 90 85 Jan-12 Mar-12 SOURCE: Commodity Research Bureau. May-12 Jul-12 Natural gas prices were up in May and early June from April lows but remain at depressed levels (Chart 6). The average price in the first half of June was near $2.30 per million Btu (MMBtu), down slightly from May but higher than the sub-$2 average in April. Chart 4 U.S. Crude Oil Inventories Reach High Millions of barrels 390 June 2012 estimate 380 370 360 350 340 2009 330 2010 320 2011 310 2012 300 290 Jan Mar May Jul Natural Gas Prices Rise Slightly Sep Nov SOURCE: Energy Information Administration. Two factors drove the increase: reduced natural gas output, and increased consumption of natural gas used for power generation. Production from shale, the primary driver of increased natural gas output in recent years, declined as producers curtailed activity in response to low prices, data from the EIA show. Additionally, power plants have substituted natural gas for coal at a surprising rate—electricity generated from natural gas is expected to rise to just over 30 percent of all generation in 2012, up from about 25 percent in 2011, according to the EIA. 780 Lower production is reflected in inventories, which increased at a fairly constant rate after bottoming out sometime in spring. So far this year, the rate at which inventories have grown is noticeably slower than in previous years. Inventories remain well above seasonal norms, but the excess has slowly fallen this quarter. 760 —Jackson Thies and Michael Plante 740 …………………………………………………………………………………………………. Chart 5 U.S. Inventories of Crude Oil Products at 2011 Levels Millions of barrels 800 720 700 June 2012estimate 2009 680 2010 660 2011 640 2012 About the Authors Thies is a senior research analyst and Plante is a research economist in the Research Department at the Federal Reserve Bank of Dallas. 620 Jan Mar May Jul SOURCE: Energy Information Administration. Sep Nov Demand across the 34-nation Organization for Economic Cooperation and Development (OECD) in 2012 is expected to fall 0.9 percent year over year, due primarily to a 2.4 percent decline in Europe. U.S. demand is also expected to slip 0.9 percent this year. In contrast, demand in non-OECD countries is forecast to increase by 2.8 percent in 2012 after rising 3.1 percent in 2011. Among these countries, Chinese demand growth has slowed recently but is expected to return to more normal levels in the second half. The IEA anticipates that Chinese Federal Reserve Bank of Dallas Chart 6 Natural Gas Prices Remain Depressed Dollars per MMBtu 2008 2009 2010 2011 2012 14 12 10 8 6 4 2 June 2012 estimate 0 Jan Feb Mar Apr May Jun SOURCE: Wall Street Journal. Quarterly Energy Update Jul Aug Sep Oct Nov Dec 2
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