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Quarterly Energy Update, Fourth Quarter 2009

February 3, 2011

2009 in Review

A strengthening global economy and increased petroleum consumption firmed oil prices throughout 2009 (Chart 1). Prices averaged $62 in 2009, swinging from a low of $34 in February to a high of $81 in late October (Table 1).

Natural gas prices declined for most of 2009 but gained traction later in the year. Prices bottomed out at just below $2 in September before rising to more than $6 at year-end (Table 1).

Table 1
Petroleum Prices Rise Throughout the Year
2008 average*
2008 high
2008 low
2009 average*
2009 high
2009 low
Percent change
Oil, WTI (per barrel)
Natural Gas, HH (per MMBtu)
Diesel, NYH (per gallon)
Gasoline, NYH (per gallon)
*Average of daily prices.
SOURCES: Wall Street Journal; calculations by the Federal Reserve Bank of Dallas.

Oil Demand Improves

Coming into 2009, worldwide oil demand continued to deteriorate. The bottom came in the second quarter, according to the International Energy Agency (IEA). The IEA recently revised upwards its estimate for 2009 global oil demand, in stark contrast to early 2009, when it made multiple downward revisions. Demand ended the year down 1.5 percent—the first time since 1983 that consumption has declined for two consecutive years.

The fall in U.S. oil consumption was deeper than the decline in world demand and is taking longer to turn around. Even though prices for oil and petroleum products were much lower in 2009 than 2008, demand continued to decline due to the weak economic environment (Chart 2). The Energy Information Administration (EIA) expects U.S. demand to grow modestly in 2010 as a result of improving economic conditions. U.S. demand declined 4.2 percent last year, but it’s expected to grow 1.1 percent in 2010.

Oil Supplies Rise

Global oil production followed a similar pattern, as consumption declined in early 2009 only to regain some ground later in the year. Production in the Organization for Economic Cooperation and Development (OECD) held steady on average, with increased production from North America offsetting a slight decline in European production. Greater production by Russia and Latin America pushed up non-OECD oil supply by approximately 600,000 barrels per day.

The Organization of the Petroleum Exporting Countries (OPEC) cut production early in the year in response to low prices. By the end of the first quarter, OPEC production was almost in line with quota levels, but as prices increased, so did production. At year-end, compliance with output quotas stood at 58 percent, compared with 83 percent in March, and production was at its highest level in a year. Even after production increases, OPEC’s excess capacity remains at 5.5 million barrels per day (Chart 3).

In 2009, U.S. crude oil output grew for the first time since 1991. Due to significant Gulf of Mexico increases, production is estimated to have risen 7.4 percent (Chart 4). The year-over-year gain in production was aided by a mild hurricane season; in 2008, a significant amount of production was shut in due to Hurricane Ike.

Inventories Rise

As petroleum consumption fell in 2009, inventories spiked to their highest level in 15 years, peaking in May. Inventories have gradually drifted back to more normal levels, though they still stand near their five-year seasonal highs (Chart 5). Days of forward demand stood at 24 at the end of 2009, below the highs seen over the past year but still elevated compared with previous years.

Gas Prices Rebound

Gasoline prices cratered in 2009, with the spot price falling under $1.10 per gallon in early January. Prices rebounded in the latter half of the year as oil prices rose and demand recovered. Vehicle miles traveled also increased throughout the year but have flattened recently as gas prices have gone up (Chart 6).

Gasoline inventories currently stand at 26 days of supply, compared with 25 days at this time last year. Distillate supplies, however, rose drastically in 2009 as a result of lower consumption. They ticked down recently but are still near the highest levels seen over the past decade.

Distillate Consumption Languishes

Unlike gasoline, distillate—which encompasses diesel fuel and heating oil—is primarily used in industrial applications. Diesel often powers heavy machinery and is the main fuel used in the transport of goods. Because distillate consumption is closely tied to industrial activity, its use declined significantly as the recession sharply impacted the manufacturing and transportation sectors. The pickup in industrial activity over the past few months has led to an increase in distillate consumption, although demand continues to languish at low levels (Chart 7).

Natural Gas Challenges

Natural gas prices fell for much of 2009 as more production came online from unconventional shale plays. U.S. production was up 3.9 percent in 2009 (year-to-date through October), while consumption fell 2.1 percent, leading to burgeoning natural gas inventories (Chart 8). However, prices rebounded sharply as the weather got colder.

As the economy regained its footing, natural gas consumption began to recover. The industrial and residential sectors were first, turning up from lows in June, followed by commercial use in July and electricity generation in August (Chart 9). The industrial and electric sectors comprise about 70 percent of natural gas consumption, and their slow recovery does not portend a significant increase in demand for 2010.

The EIA expects prices to average $5.36 in 2010, with ample domestic production capacity and continued weak consumption keeping a lid on prices.

—Jackson Thies and Mine Yücel

About the Authors

Thies is a research analyst and Yücel is a vice president and senior economist in the Research Department at the Federal Reserve Bank of Dallas.


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