Petroleum prices forecast to rise in 2011 and 2012

by Ron Sterk
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In its most recent Short-Term Energy Outlook, the Energy Information Administration of the U.S. Department of Energy forecast average 2011 crude oil prices 18% above 2010 levels, with average gasoline and diesel fuel prices both up 14%.

“We came into 2011 looking at $100-a-barrel crude,” one industry analyst said. He noted the European-based Brent crude oil price did near $100, but in the United States the benchmark West Texas intermediate (W.T.I.) crude price has been pressured by “a lot of supply.”

The W.T.I. spot price was quoted at $86.15 a barrel last week, down from a high near $92 a barrel in mid-January. The nearby March New York crude oil futures contract closed at a high of $92.87 a barrel on Jan. 12, but had dropped about 7% to near $86 a barrel last week.

The E.I.A. forecast W.T.I. crude oil to average $93.42 a barrel in 2011, up about $14 from $79.41 a barrel in 2010. The average was forecast at $97.50 a barrel for 2012, with the fourth quarter of 2012 forecast at $99 a barrel.

“E.I.A.’s forecast assumes U.S. real gross domestic product grows 2.2% in 2011 and 2.9% in 2012, while world real G.D.P. grows by 3.3% and 3.7% in 2011 and 2012, respectively,” the agency said.

The industry analyst agreed with the E.I.A.’s forecast average price, but said he expected a “test” of $100 a barrel in 2011.

“We’ll see a gradual price appreciation during the year,” he said. Unlike 2007-08 when crude oil prices doubled in about a 10-month period and peaked near $150 a barrel in July 2008, he suggested values were more grounded this year, held in check by gradual domestic and global economic expansion and a “practical” approach by China to keep its inflation in check. Still, he said, the emerging markets, especially China, would be the primary force behind rising crude prices.

Like crude oil, liquid fuel prices also were forecast to escalate in 2011. The average retail self-serve price of regular gasoline was forecast at $3.17 a gallon in 2011, up 39c, or 14%, from $2.78 a gallon last year, and at $3.29 a gallon in 2012. The average on-highway diesel fuel price was forecast at $3.40 a gallon in 2011, up 41c, or 14%, from $2.99 a gallon in 2010, and at $3.52 a gallon in 2012.

“Rising crude oil prices are the primary reason for higher retail prices, but higher gasoline and distillate refining margins are also expected to contribute to higher retail prices,” the E.I.A. said.

The market analyst agreed diesel fuel prices would follow crude oil higher. Recent strength in diesel fuel has been prompted by cold weather and increased demand for heating oil, he said. The on-highway average diesel fuel price was quoted by the E.I.A. last week at $3.43 a gallon and has increased weekly since early December.

“E.I.A. expects a continued tightening of world oil markets over the next two years,” the agency said. “World oil consumption grows by an annual average of 1.5 million barrels per day through 2012 while the growth in supply from non-OPEC (Organization of the Petroleum Exporting Countries) countries averages less than 100,000 barrels per day each year.”

Although significant for the U.S. ethanol industry, the recent decision by the U.S. Environmental Protection Agency to expand ethanol use in older cars was expected to have only minimal impact on petroleum products. On Jan. 21 the E.P.A. approved the use of E15 fuel (gasoline with up to 15% ethanol), up from E10, in vehicles made from 2001 to 2006, adding to its earlier approval for use in vehicles made in 2007 and later. It was estimated the addition will allow E15 fuel to be used in more than 60% of U.S. cars and trucks.

“The E.I.A. expects slow growth in fuel ethanol production over the next two years,” the agency said. It forecast growth of 6% in 2011 and 1% in 2012.

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