Price stability key to oil, gas markets today

Price stability is the watchword in oil and gas markets these days. But the two markets are coming at it from different directions.

Oil markets are anticipating higher prices as supply tightens again, while gas markets (at least in the US) are anticipating some price moderation as cold weather relents and demand is squeezed.

OPEC and oil prices

OPEC will enter its latest ministerial meeting next week in Vienna with a consensus on cutting oil production in order to shore up sagging oil prices.

Since a peak of about $36/bbl in autumn 2000, oil prices have dropped by as much as $10/bbl before rebounding in recent weeks. Just as oil prices were bid up to probably unsustainable levels on the expectation that Iraq might cut off oil supplies, the big shrug of self-fulfilling prophecy that greeted Baghdad's fulfillment of the threatened cutoff meant a price drop. (Other factors were evidence of stockbuilding as earlier OPEC increases finally hit the market and a decline in demand.) Correspondingly, the widespread expectation that OPEC will cut production next week in Vienna has caused oil prices this week to rebound to almost $30/bbl.

The question of import, of course, is: how much of a cut? Reports from various OPEC capitals indicate suggested cuts could range anywhere from 1 million b/d to 2 million b/d. It's impossible to foretell how much of a cut will produce the desired soft landing for oil prices, but a wise guess would focus on what's politically acceptable. Right now, with energy markets in general jittery, signs of an economic slowdown spreading, and political ire rising in the US, OPEC probably will heed the price doves led by Saudi Arabia and cut output by less than 2 million b/d. However, the market may very well not respond to a cut of only 1 million b/d, especially if the next API and IEA reports indicate continued stockbuilding.

So let's throw a dart at the board and shoot for 1.5 million b/d. That would probably keep WTI close enough to $25/bbl to keep Riyadh happy but sufficiently far south of $30/bbl to keep Washington happy.

Power to sustain gas prices

The respite from cold weather and the collapse in much industrial demand has seen natural gas prices retreat a bit from the near-$10/Mcf level of recent weeks.

But while cold weather has sustained US natural gas prices at unprecedented levels in recent weeks, the outlook for continued high gas prices in the coming decade owes more to burgeoning demand for gas from the electric power sector.

That's the view of Ed Krapels, director of Energy Security Analysis Inc.'s natural gas and power practice, who contends that demand from the electric generation sector is the main culprit for extreme price volatility in the natural gas market.

"Gas prices will average $6 in years when hot summers follow cold winters, and $3 in years when cool summers follow mild winters," Krapels said. "This is the central and irreducible consequence of the choice made over the last 5 years to make natural gas the primary fuel for generating new electricity supplies."

As far as 2001 is concerned, it already shapes up as a year with a very cold winter, leading ESAI to project an average gas price of $5.33/MMbtu-a projection it deems too low if summer proves to be very hot (OGJ, Jan. 8, 2001, Newsletter, p. 5).

"This is a significant development, considering that natural gas prices have averaged approximately $2.00/MMbtu over the past 10 years," Krapels said.

Gas price factors

ESAI cites four key factors that will affect gas prices in 2001

  • The weather. If the first quarter is as cold as November-December was and a really hot summer throughout the US follows, that's a recipe for an average Henry Hub price of $6-7/MMbtu for the full year, ESAI contends. If this winter turns mild, followed by a temperate summer throughout the US, the price is likely to average $3-4/MMbtu for the full year.
  • The supply response. "No one is investing serious capital in gas reserouce development that requires $5[/MMbtu] for 10 years, nor should they," Krapels said. "Hence, the supply response that we can expect in 2001 and 2002 is based on sustainable $3-4 gas."
  • The inventory level and consequent prices. Incremental supply will be swallowed by higher demand in the first quarter, keeping prices buoyed at $8-9/MMbtu early in the period and drifting down to $6/MMbtu in March, ESAI contends: "During the second quarter, the incremental supply will be sucked into a nearly depleted stockpile."
  • The demand response from consumers dependent on natural gas for space heating. The analyst contends that residential consumers will conserve aggressively and that demand from power producers will continue to grow as more gas-fired electricity capacity will come on line in 2001.

Inventory squeeze

The squeeze on US natural gas storage will ensure that gas prices remain bolstered in 2002-and probably beyond, says Lehman Bros.' Thomas Driscoll.

"We expect to exit winter with storage at about 200-400 bcf vs. a normal level of around 1,000 bcf," he said. "Industry is unlikely to be able to refill storage for next winter; thus, low inventory levels will likely continue to exert upward pressure on gas prices for a prolonged period of time."

Accordingly, Lehman Bros. last week hiked its 2001 natural gas price forecast to $6.25/MMmbtu from an earlier forecast of $5.00/MMbtu and its 2002 natural gas price projection to $4.50/MMbtu from $4.15/MMbtu.

The storage shortfall-with expected season-end levels put as low as a fifth of levels seen for last year and for the 5-year average-equals about 6-7% of production over the 7-month refill season, Driscoll notes.

Don't look for US natural gas production to come to the market's rescue anytime soon, Lehman Bros. contends.

"We estimate that US natural gas production has fallen nearly 7% over the past 3 years," Driscoll said. "We think that US natural gas production is back to 1990 levels.

"Although [third quarter 2000] probably represented the production trough, we believe that production will rise more slowly this year than is expected by many investors. We are forecasting a production increase of 1-2% in 2001."

Crimping demand

The key to balancing US gas markets, says Driscoll, may be "demand destruction."

"Clearly, current high prices are causing decreases in consumption by many industrial and perhaps commercial customers," he said. "In the fourth quarter, we estimate that heating demand increased by 564 bcf compared with [fourth quarter] 1999 levels; this demand increase was met not by supply growth but by a 301 bcf increase in storage withdrawals plus a 263 bcf decreased in nonheating consumption."

With fourth quarter natural gas spot prices averaging about $6.25/MMbtu, Lehman Bros. thinks that nonheating demand for gas fell in the period by 2.9 bcfd.

"Thus we expect that a first quarter average price of $8-10/MMbtu would cause an even larger demand response," Driscoll said.

OGJ Hotline Market Pulse
Latest Prices as of January 12, 2001

Click here to enlarge image


Click here to enlarge image


Nymex unleaded

Click here to enlarge image


Nymex heating oil

Click here to enlarge image


IPE gas oil

Click here to enlarge image


Nymex natural gas

Click here to enlarge image


Related Articles

BP to settle federal, state Deepwater Horizon claims for $18.7 billion

07/02/2015 BP Exploration & Production Inc. has agreed in principle to settle all federal and state claims arising from the 2010 Deepwater Horizon inciden...

MARKET WATCH: NYMEX oil prices plummet on crude inventory build, Iran deadline extension

07/02/2015 Oil prices plummeted more than $2/bbl July 1 to settle at a 2-month low on the New York market after a weekly government report showed the first ri...

Shell makes FID on Appomattox deepwater development in Gulf of Mexico

07/01/2015 Royal Dutch Shell PLC has taken a final investment decision (FID) on the Appomattox deepwater development, authorizing construction and installatio...

MARKET WATCH: Oil prices decline as US crude inventories post first gain in 9 weeks

07/01/2015 Oil prices on July 1 surrendered much of their gains from the day before after the release of a government report showing the first rise in US crud...

BHP, Woodside move to decommission Stybarrow field

07/01/2015 BHP Billiton Ltd. and Woodside Petroleum Ltd. have started preparations for decommissioning of the Stybarrow group of oil fields in production lice...

Tullow Oil provides production update on Jubilee, other fields

07/01/2015 Tullow Oil PLC reported that gross production for the Jubilee field offshore Ghana averaged 105,000 b/d in this year’s first half, up from 102,000 ...

USGS: Water usage for fracturing varies widely across shale plays

07/01/2015 The volume of water required to hydraulically fracture wells varies widely across the country, according to the first national analysis and map of ...

Contract let for converting FPSO for use in Libra field

06/30/2015 Jurong Shipyard Pte. Ltd. has let a topsides detailed engineering and procurement services contract to Technip SA as part of the conversion of a sh...

Survey begins of collaboration on the UKCS


Deloitte has begun a survey about collaboration in the oil and gas producing industry of the UK Continental Shelf.

White Papers

UAS Integration for Infrastructure: More than Just Flying

Oil and gas companies recognize the benefits that the use of drones or unmanned aerial systems (UAS) c...

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by
Available Webcasts

Operating a Sustainable Oil & Gas Supply Chain in North America

When Tue, Oct 20, 2015

Short lead times and unpredictable conditions in the Oil & Gas industry can create costly challenges in supply chains. By implementing a LEAN culture of continuous improvement you can eliminate waste, increase productivity and gain end-to-end visibility leading to a sustainable and well-oiled supply chain.

Please join us for this webcast sponsored by Ryder System, Inc.


On Demand

Leveraging technology to improve safety & reliability

Tue, Sep 22, 2015

Attend this informative webinar to learn more about how to leverage technology to meet the new OSHA standards and protect your employees from the hazards of arc flash explosions.


The Resilient Oilfield in the Internet of Things World

Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.


Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!


Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected