Strong growth in U.S. crude oil production, primarily attributable to growing volumes of light crude oil produced from onshore tight oil formations, has reshaped global oil markets in recent years. EIA expects this growth trend to continue for the next two years, as forecast in this month's Short-Term Energy Outlook (STEO).

EIA estimates that U.S. crude oil production averaged 7.5 million barrels per day (bbl/d) in 2013, the highest annual average rate of production since 1989, and a 1.0-million-bbl/d increase from 2012 (Figure 1). In the January STEO, which extends the forecast period through 2015, EIA expects continued strong production growth. EIA projects crude oil production to average 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015, which would be the highest annual rate of crude oil production since 1972. The record highest annual average crude oil production was 9.6 million bbl/d in 1970.

Production from tight oil formations in Texas, North Dakota, and a handful of other states has driven total crude oil production growth for the past four years. Development activity in these key onshore basins and increasing productivity as companies learn how to apply hydraulic fracturing techniques more effectively and efficiently are central to STEO's forecast. In particular, EIA expects most growth through 2015 to result from drilling in the Bakken formation in North Dakota and Montana, the Eagle Ford formation in Texas, and the Permian Basin in Texas and New Mexico. Bakken production is expected to rise from the estimated December 2013 level of 1.0 million bbl/d to 1.3 million bbl/d in December 2015. Eagle Ford production is projected to increase from an estimated December 2013 level of 1.2 million bbl/d to 1.5 million bbl/d in December 2015. The Eagle Ford accounts for more than half of the onshore domestic liquids production growth because of a comparatively large amount of liquids coming from both oil and gas wells compared with the other key production basins.

The Permian Basin in West Texas, which includes thick, overlapping formations such as the Spraberry, Bonespring, and Wolfcamp, is a third key growth area. EIA estimates that crude oil production from the Permian Basin reached 1.5 million bbl/d in December 2013 and is projected to increase to 1.8 million bbl/d in December 2015. Crude oil producers are investing heavily in research and implementation of hydraulic fracturing in both vertical and horizontal wells. The stacked formations of the Permian allow vertical wells to reach several productive zones, while several horizontal wells drilled from the same surface location can target different formations or several pay zones within the same formation.

While onshore crude oil production is expected to account for the bulk of the total production increase through 2015, projected growth also reflects expected increases in offshore production from the U.S. federal Gulf of Mexico (GOM). After offshore GOM oil production was flat at 1.3 million bbl/d in 2013, EIA projects GOM crude oil production will increase to 1.6 million bbl/d in 2015. The expected increases from GOM are the result of the following projects that are expected to come on stream: Jack, St. Malo, Entrada, Big Foot, Tubular Bells, Atlantis Phase 2 redevelopment, Hadrian South, and Lucius in 2014; Axe, Cardamom Deep, Dalmation, Deimos South, Kodiak, Pony, Samurai, West Boreas, Winter, and Mars B redevelopment in 2015.

These continuing increases in crude oil production are having profound effects on U.S. petroleum balances and global oil prices. EIA expects the discount of the WTI crude oil price to Brent to average $12 per barrel (bbl) in 2014, $3/bbl higher than projected in last month's STEO. This increase in the projected WTI discount reflects increasing uncertainty about existing refinery infrastructure's ability to absorb growing production of light sweet crude oil in North America at current price levels. Because of pipeline capacity expansions and pipeline reversals, there is now ample capacity to ship crude oil via pipeline from the previous bottleneck in the Midcontinent to the Gulf Coast. As a result, Light Louisiana Sweet (LLS) crude oil on the Gulf Coast, which was priced at a premium to North Sea Brent for much of the past two years, has recently begun tracking WTI prices and selling at a consistent discount to Brent. Thus, EIA expects the recent convergence of Gulf Coast crude oil prices with WTI to persist over the forecast period, with Gulf Coast crude oil prices moving in step with the WTI price plus a pipeline transport cost. At this price level, Gulf Coast crudes such as LLS and medium-grade Mars will trade at historically wide discounts to similar international benchmarks such as Brent and Dubai, respectively. The forecast relationship between Brent, WTI, and LLS prices in 2015 are similar to those expected in 2014.

Gasoline price flat while diesel fuel up slightly
The U.S. average retail price of regular gasoline increased less than one cent to remain at $3.33 per gallon as of January 6, 2014, three cents higher than last year at this time. Prices increased in all regions of the nation except the Midwest, where the price declined four cents to $3.22 per gallon. The largest increase came on the East Coast, where the price was up three cents to $3.44 per gallon. Both the Rocky Mountain and West Coast prices gained two cents, to $3.12 per gallon and $3.55 per gallon, respectively, and the Gulf Coast price was $3.12 per gallon, a penny higher than last week.

The national average diesel fuel price increased one cent to $3.91 per gallon, less than a penny lower than last year at this time. Prices increased in all regions of the nation, with the East Coast, Gulf Coast, and Rocky Mountain prices all gaining one cent, to $3.95 per gallon, $3.80 per gallon, and $3.90 per gallon, respectively. The West Coast average rose nearly a cent, but remained at $4.03 per gallon, while the Midwest price increased only fractionally, and remained at $3.89 per gallon.

Propane inventories fall
U.S. propane stocks fell by 3.5 million barrels to end at 42.4 million barrels last week, 23.1 million barrels (35.3%) lower than a year ago. Gulf Coast regional inventories dropped by 2.1 million barrels and Midwest inventories decreased by 1.2 million barrels. Rocky Mountain/West Coast and East Coast inventories both dropped by less than 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane inventories.

Residential propane price continues to increase, heating oil price decreases
Residential heating oil prices decreased by nearly 2 cents per gallon to reach a price of $4.02 per gallon during the period ending January 6, 2014. This is less than 2 cents per gallon higher than last year's price at this time. Wholesale heating oil prices decreased 15 cents per gallon last week to $3.07 per gallon.

The average residential propane price increased by almost 3 cents per gallon last week to nearly $2.83 per gallon, 56 cents per gallon higher than the same period last year. Wholesale propane prices decreased by less than a penny per gallon to just under $1.69 per gallon as of January 6, 2014.
Source: EIA