Soft demand cuts energy prices

Sam Fletcher
Senior Writer

Two reports of reduced demand undercut energy prices on May 12, dropping the June crude contract within pennies of $72/bbl after five consecutive sessions of gains on the New York market and reducing June natural gas to $6.28/MMbtu, the lowest price for a front month gas contract in nearly a year.

The Paris-based International Energy Agency (IEA) on May 12 reduced its 2006 estimate of the growth of world demand for crude by 220,000 b/d, or 15%, primarily because of weaker US demand as a result of high fuel prices and large exports of crude from former Soviet countries, indicating weaker demand in that region.

"We had been expecting such a revision, as the agency's prior 1.47 million b/d growth forecast was well above last year's 1 million b/d demand increase and because we believe that sustained high crude oil prices should slow consumption," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

IEA increased its forecast of the growth of crude supplies from producers outside the Organization of Petroleum Exporting Countries by 30,000 b/d for a total growth of 1.2 million b/d. However, that estimate is "growing increasingly back-end-loaded, as supply has been slow to recover from a series of late 2005 outages," Rousseau said. "Over the past 5 years, non-OPEC supply has grown an average of 850,000 b/d per year."

IEA reduced its 2006 call on OPEC supplies by 200,000 b/d to 29.2 million b/d. IEA estimates OPEC's sustainable production capacity at 30.3 million b/d, excluding Iraq, which is still trying to get back to prewar production levels.

On the same day, the widely watched University of Michigan consumer sentiment index fell to 79 for May from 87.4 in April. That decline to the lowest level since October surprised many analysts who expected a much smaller decline. The monthly current-conditions index registered the biggest loss since 1978, down by 13 points to 96.2. The former record was a loss of 10.7 points in November 1981. Analysts said the index rarely has dropped 10 or more points. Its last major fall followed Hurricane Katrina last September.

Although higher fuel prices have had little obvious effect so far on consumers and US economic growth, University of Michigan analysts said the largest proportion of survey respondents in 25 years blamed high gasoline prices for reducing their discretionary spending.

However, geopolitical problems in Iraq, Iran, Nigeria, and South America still threaten future supplies of crude and provide some support to energy prices. Iran is still defying US and European pressures over its nuclear program, and no unified action by the United Nations Security Council is yet in sight. In Nigeria, more than 500,000 b/d of crude production remains shut in, and violence escalated with the May 10 assassination of a Baker Hughes Inc. executive.

That same week, Bolivian President Evo Morales said oil companies, including Brazil's state-owned Petroleo Brasileiro (Petrobras) and Spain's Repsol YPF SA, won't be compensated after nationalization of their oil and gas reserves. Bolivia took control May 1 of the country's oil and gas fields and gave foreign energy companies operating in the country 180 days to agree to new contracts with the government (OGJ Online, May 2, 2006).

Gas outlook
Meanwhile, publicly traded companies reported a 2.8% reduction in US production of natural gas in the first quarter of 2006. "Of course, a big chunk of this gas production decline was due to hurricane-related production deferrals. If we try to remove the hurricane impact, it appears that US gas production would have actually been up a very modest 0.5%," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc.

However, he added, "Constraints in rig availability are likely to become more pronounced, and gains in efficiencies should slow at the same time that higher decline rates begin to kick in and prospect quality continues to fade." That means US gas supply could remain tight for years.

"Today's gas story is much like the 1970s oil story, when oil production continued to stagnate despite greater and greater numbers of active drilling rigs. Accordingly, we expect domestic gas production levels to remain relatively flat over the foreseeable future, with some quarters showing small declines and others showing limited growth," Adkins said.

As surplus gas storage is worked off, US gas prices should rebound to the traditional 6:1 btu parity with crude or potentially even higher, Adkins said. "If oil prices remain near the $70/bbl level, this would imply fair value for gas well above $10/Mcf," he said.

Note: This feature will appear next on May 29, 2006.

(Online May 15, 2006; author's e-mail: samf@ogjonline.com)


Related Articles

URTeC: Shell’s Hackbarth says unconventional innovation begins with data

07/20/2015 Operators should resist the impulse to pull back on investments in technology despite a down oil market, said Claudia J. Hackbarth, manager, unconv...

BPTT relocates Juniper project fabrication work to Texas

07/20/2015 BP Trinidad & Tobago LLC (BPTT) reported that it has agreed to relocate fabrication of its Juniper platform’s jacket and piles from Trinidad Of...

URTeC: Panel sees resiliency in unconventional space

07/20/2015 Panelists commented on future recovery of oil prices and the growth of unconventional drilling, then took questions from an overflow audience durin...

PV seen gaining on gas-fueled electricity

07/20/2015 Utility-scale photovoltaic (PV) conversion of solar energy into electricity soon will be competitive with generation fueled by natural gas, predict...

Gas compression problems limit oil production at Jubilee field offshore Ghana

07/20/2015 Tullow Oil PLC reported oil production at Jubilee field offshore Ghana is constrained to 65,000 b/d due to technical issues with gas compression sy...

MARKET WATCH: NYMEX crude oil prices settle nearly flat on lower rig count

07/20/2015 Light, sweet crude oil prices settled nearly flat on the New York market on July 17 after a volatile trading session that started with prices going...

OGJ Newsletter

07/20/2015

International news for oil and gas professionals

Watching Government: DOI, EPA budget battles

07/17/2015 White House Office of Management and Budget Director Shaun Donovan did not mince words on July 7 when he described problems the Obama administratio...

PHMSA issues state pipeline excavation damage prevention programs rule

07/17/2015 The US Pipeline and Hazardous Materials Safety Administration issued a final rule to establish the process for evaluating state excavation damage p...
White Papers

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

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
Available Webcasts


The Resilient Oilfield in the Internet of Things World

When 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.

register:WEBCAST



On Demand

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

register:WEBCAST


Driving Growth and Efficiency with Deep Insights into Operational Data

Wed, Aug 19, 2015

Capitalizing on today’s momentum in Oil & Gas requires operational excellence based on a clear view of what your business data is telling you. Which is why nearly half* of oil and gas companies have deployed SAP HANA or have it on their roadmap.

Join SAP and Red Hat to learn more about using data to drive process improvements and identify new opportunities with the SAP HANA platform running on Red Hat Enterprise Linux. This webinar will also show how your choice of infrastructure impacts the performance of core business applications and your ability to achieve data-driven insights quickly and reliably.

*48% use SAP, http://go.sap.com/solution/industry/oil-gas.html

register:WEBCAST


OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


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