Quarterly Energy Update
Prolonged Cold Weather in U.S. Causes Price Swings
First Quarter 2014 · Update in PDF
U.S. energy prices were impacted by cold weather in the first quarter. Prices spiked for heating fuels and natural gas, with large withdrawals of natural gas from storage. Globally, the reaction of energy markets to the Crimean crisis was short lived. Global oil demand is expected to grow 1.3 percent and supply is forecast to increase 1.5 percent in 2014. Oil supply continues to be ample despite supply disruptions across the globe, aided by increased U.S. oil production.
Cold Winter Impacts Energy Prices
This winter has been the coldest in 13 years in the U.S., based on heating-degree days (the number of days in which heating energy is required). The weather increased demand for heating fuels, which caused the price of propane delivered to the Midwest, priced in Conway, Kan., to spike to a record high of $4.95 per gallon on Jan. 24 and to a record premium over Gulf Coast propane, priced in Mont Belvieu, Texas (Chart 1). The Midwest propane price dropped at the end of the quarter to Gulf Coast levels as warmer weather arrived.
The cold weather also affected natural gas prices in the Northeast, where natural gas is the primary fuel used for heating. Transco Zone New York natural gas sold at a premium to the Henry Hub natural gas spot price on the Gulf Coast for most of the first quarter, with the Transco Zone cash price jumping to $77.64 per million British thermal units (MMBtu) on Jan. 24, while the Henry Hub price was $4.99 (Chart 2). Electricity prices also surged during cold temperature days.
Crude oil prices were relatively steady in the first quarter. West Texas Intermediate (WTI), the domestic benchmark, has traded in an $11-per-barrel range since the beginning of the year, while Brent, the international benchmark, traded in a $3-per-barrel range. The differential between the two prices also narrowed in the quarter. WTI averaged $99 per barrel, $4 per barrel higher than first quarter 2013, while Brent averaged $108, $4 lower than the first quarter last year (Chart 3).
Retail regular gasoline prices strengthened slightly in the first quarter, averaging $3.40 per gallon, up 11 cents from fourth quarter 2013. However, this price is below first quarter 2013, when the average was $3.57 per gallon. On-highway diesel prices also increased in the first quarter, gaining 9 cents over fourth quarter 2013 to average $3.96 per gallon. Diesel prices remained below their first quarter 2013 average of $4.03.
International Supply and Demand
The Crimean crisis did not affect crude oil prices, but it did temporarily push up European natural gas prices. Over 30 percent of gas consumed in the European Union is supplied by Russia. In 2009, the last time Russia cut off gas supplies to Ukraine, 80 percent of Russian supplies to Europe passed through Ukraine. Now, only 50 percent passes through Ukraine. This is because a new pipeline that connects Russia directly with Germany, bypassing Ukraine, was constructed after 2009. This most recent crisis has prompted European Union leaders to develop a plan to reduce reliance on Russian natural gas.
First-quarter global petroleum consumption was 90.7 million barrels per day (mb/d), according to the Energy Information Administration (EIA), slightly below fourth quarter 2013 levels but 1.4 mb/d higher than a year ago. The EIA projects 2014 demand to grow 1.2 mb/d over 2013, averaging 91.6 mb/d for the year. Most of this growth in demand will come from countries outside the Organization for Economic Cooperation and Development, with China accounting for a majority of the increase.
Global petroleum supply is expected to outpace demand again in 2014. The EIA projects supply to increase by 1.3 mb/d over 2013, averaging 91.7 mb/d in 2014. The International Energy Agency forecasts are more bullish, putting 2014 growth at 1.7 mb/d, the highest rate since the early 1990s. Countries outside the Organization of the Petroleum Exporting Countries, particularly the U.S., Canada and Brazil, will contribute most of the supply growth.
U.S. Energy Indicators
Consumption of motor gasoline in the U.S. softened in the first quarter. Average demand fell by 54 thousand barrels per day (kb/d) from fourth quarter 2013 to 8.8 mb/d in the first quarter but remained above year-ago levels (Chart 4). The decline was likely due to colder weather and slightly higher prices. Some of the slack was picked up by increased exports. First-quarter net exports rose 149 kb/d over the fourth quarter to average 541 kb/d.
U.S. crude oil production is projected to continue to increase. The EIA estimates first-quarter production to average 8.04 mb/d, a 0.2 mb/d increase over fourth quarter 2013. Because of the production growth, U.S. refiners have announced expansion plans to process more crude oil. Domestic production growth has also contributed to a significant decline in petroleum imports; net crude oil imports are estimated to fall 0.1 mb/d from fourth quarter 2013 to average 7.25 mb/d in the first quarter.
The Henry Hub natural gas spot price strengthened during the first quarter due to harsh winter weather. Henry Hub averaged $5.13 per MMBtu, $1.64 higher than a year ago. Colder-than-normal temperatures in the first quarter led to large withdrawals of gas from storage in response to high demand from the residential, commercial and electric power sectors (Chart 5). As the weather normalized across the country, natural gas prices declined to $4.28 in the last week of March.
—Amy Jordan and Mine Yücel
About the Authors
Jordan is a senior research analyst and Yücel is senior vice president and director of research at the Federal Reserve Bank of Dallas.
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