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

BG’s 2015 budget ‘significantly lower than 2014’

02/03/2015 BG Group plans capital expenditures on a cash basis of $6-7 billion in 2015, a range it says is “significantly lower than 2014” due to “a lower oil...

BP trims capital budget by $4-6 billion

02/03/2015 BP PLC plans an organic capital expenditure of $20 billion in 2015, down from the previous guidance $24-26 billion. Total organic capital expenditu...

IHS sees second-half end of US output surge


Expectations are moderating about growth of oil production in the US this year.

Gazprom Neft starts shale oil production in western Siberian field

02/03/2015 JSC Gazprom Neft reported start of shale oil production from the Bazhenov formation during tests of two wells in southern Priobskoye field in centr...

Anadarko reports 2014 loss, remains upbeat about Wattenberg

02/03/2015 Anadarko Petroleum Corp. announced a 2014 net loss of $1.75 billion, or $3.47/share diluted, including a net loss of $4.05 billion associated with ...

CNOOC cuts capital budget, starts production from Jinzhou 9-3

02/03/2015 CNOOC Ltd. is slashing its capital budget for 2015 by 26-35% to $11.25-12.86 billion compared with last year’s budget. Capital expenditures for exp...

MARKET WATCH: NYMEX crude oil stays positive on lower rig count

02/03/2015 Oil prices on the New York and London markets closed higher Feb. 2 on positive momentum generated by a falling US rig count, suggesting cuts in pro...

Obama’s proposed fiscal 2016 budget recycles oil tax increases

02/02/2015 US President Barack Obama has proposed his federal budget for fiscal 2016 that he said was designed to help a beleaguered middle class take advanta...

Tight oil price test

02/02/2015 The basic job for Oil & Gas Journal writers is to pick the right words and put them in the right order, which is often harder to do than it mig...
White Papers

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

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts

The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

When Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.


On Demand

Prevention, Detection and Mitigation of pipeline leaks in the modern world

Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 


Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.


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