Although crude oil prices dropped in early may, the U.S. Department of Energy still expects oil markets to tighten through 2012 and predicts that WTI spot prices, which averaged $79 per barrel in 2010, will average $102 per barrel in 2011 and $107 per barrel in 2012.

In its monthly Short-Term Energy Outlook, the DOE's Energy Information Agency noted that world benchmark crude oil prices reached their highest level of this year at the end of April, fell by about 10 percent by May 9 and have changed very little since then. EIA still expects oil markets to tighten through 2012 given projected world oil demand growth and slowing growth in supply from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC).

The agency expects that on-highway diesel fuel retail prices, which averaged $2.99 per gallon in 2010, will average $3.87 per gallon in 2011 and $3.95 per gallon in 2012.

The forecast calls for the average regular-grade gasoline retail price to increase from $2.78 per gallon in 2010 to $3.60 per gallon in 2011 and to $3.67 per gallon in 2012. The sizable jump in retail prices this year reflects not only the higher average cost of crude oil, but also an increase in U.S. refinery margins on gasoline (the difference between refinery wholesale gasoline prices and the average cost of crude oil) from an average of $0.34 per gallon in 2010 to $0.47 per gallon in 2011, still 6 to 9 cents per gallon below the record margins set in 2006 and 2007. Unexpected shutdowns of U.S. refining capacity in March and April with a large drop in gasoline stocks on the East Coast, along with flooding of the Mississippi river in May, contributed to the increase in margins this year. The projected refinery gasoline margin declines to $0.44 per gallon in 2012.

EIA expects total natural gas consumption will grow by 1.4 percent to 67.1 billion cubic feet per day (Bcf/d) in 2011 and 67.2 Bcf/d in 2012.

The Henry Hub spot price averaged $4.31 per MMBtu in May, 6 cents higher than the April average and 11 cents higher than forecast in last month's Outlook. EIA expects that the Henry Hub price will average $4.25 per MMBtu in 2011, a decline of 13 cents from the 2010 average. EIA expects that the slowing growth in production will contribute to a tightening domestic market next year with the Henry Hub price averaging $4.58 per MMBtu in 2012.