In its latest Short-Term Energy Outlook (STEO), the US Energy Information Administration has lowered its projections for oil and natural gas demand in 2009-10 as the global economic contraction continues to depress energy demand.
EIA now expects US real gross domestic product to decline 2.8% in 2009, leading to a reduction in energy consumption for all major fuels. EIA forecasts that an economic rebound will begin in 2010, with 1.9% year-over-year growth in US real GDP.
Average annual world oil consumption is projected to decline almost 1.4 million b/d in 2009, with consumption in Organization for Economic Cooperation and Development countries falling 1.6 million b/d. This expected decline is 200,000 b/d larger than in last month’s STEO, reflecting lower expectations of global economic activity this year.
EIA assumes that worldwide GDP growth will decline 0.8% this year, followed by growth of 2.6% in 2010, compared with last month’s assumption of a 0.1% decline this year and 3% growth next year.
Gas demand, production
The US economic downturn is also the principal cause for the expected decline in domestic gas consumption, EIA said, particularly in industrial usage, where gas demand is projected to fall 6% in 2009.
EIA sees US gas consumption declining 1.3% this year, and then rebounding a bit in 2010. However, it forecasts that gas consumption by the electric power industry will grow 0.4% in 2009.
Consequently, EIA’s latest monthly forecast indicated that total US marketed gas production is expected to remain flat in 2009 and then fall by 0.8% in 2010. “Baker Hughes reports 916 natural gas rigs working in the United States as of Mar. 6, a decline of 43% from August 2008. Consequently, the robust growth in gas production in the Lower 48 states (excluding the Gulf of Mexico) over the last few years is expected to end as production reaches about 53 bcfd in early 2009, then declines during the second half,” EIA said.
The extent of the second-half production decline “is highly uncertain and subject to fluctuations in demand and prices over the period,” it added. “However, annual average production is still projected to be lower next year because of the decline in new wells drilled this year.”
Oil, gas price forecasts
EIA forecasts that the global economic slowdown will cut the price of West Texas Intermediate crude by more than half from last year’s $100/bbl average. It expects WTI to average $42/bbl in 2009, and $53/bbl in 2010. These price forecasts are slightly lower than in the previous STEO.
Federal Reserve Bank of Dallas, in its latest Houston Economic Update, said the West Texas Intermediate crude price has fluctuated at $34-48/bbl since early January. The Israel-Hamas and Russia-Ukraine conflicts, plus cold weather and production cuts by Organization of Petroleum Exporting Countries members, worked to boost prices but were trumped by the weak economy and the massive buildup in US crude inventories, which “pushed their levels far outside historical ranges,” the Dallas Fed economists reported.
In contrast, very cold weather in Chicago and key East Coast markets held gas prices in place for much of the winter, said the Dallas Fed, “but as weather has moderated and winter ends, prices have fallen…to near $4/Mcf, the lowest level in over 6 years. Rising domestic production, Canadian imports, and very weak industrial demand combined to pull [gas] prices down in the absence of frigid temperatures,” it continued.
EIA said the Henry Hub natural gas spot price is forecast to decline to about $4.70/Mcf this year, from an average of $9.13/Mcf in 2008 but then increase in 2010 to an average of almost $5.90/Mcf.
Downstream trends
The Dallas Fed reported that oil refiners’ margins have slowly improved the past few weeks from very poor levels in December “and the last few weeks have been quite good. Operating rates, however, were relatively weak throughout the period.”
It expects US liquid fuels demand to drop another 420,200 b/d to an average 19 million b/d this year after plunging nearly 1.3 million b/d to an average 19.4 million b/d in 2008. By 2010, it anticipates a 210,400 b/d increase to an average 19.2 million b/d in the wake of the expected economic recovery.
EIA replaced its petroleum products classification this month with a new liquid fuels category that includes natural gas liquids, biofuels, and liquids derived from other hydrocarbon sources such as coal and gas.
EIA reported in its latest STEO that retail gasoline prices, slowly increasing over the last 2 months, are projected to average $1.96/gal in 2009 and $2.18/gal next year.
“The monthly average price [of regular grade retail gasoline] is expected to peak slightly over $2/gal this year, although it remains possible that weekly prices could rise significantly higher at some point this spring or summer,” EIA said. “Because of lower motor gasoline consumption, refining margins for gasoline are expected to remain depressed for much of 2009 but are expected to increase slightly in 2010 as consumption begins to recover.”
EIA projects an average on-highway diesel fuel retail price of $2.19/gal for 2009 and $2.51/gal for 2010. “The expected continuing decline in diesel fuel consumption in the United States this year as well as the growing weakness in distillate fuel usage outside the United States are projected to result in a narrowing of refining margins for distillate throughout the forecast period. Because of the global weakness in industrial output, it is possible that we will see diesel prices fall below gasoline prices this summer,” it added.
Texas, Houston hit hard
The domestic rig count has followed oil and gas prices down, according to the Dallas Fed report. Citing figures compiled by Baker Hughes Inc., it said the number of rigs making hole peaked during September 2008 at 2,031 before dropping to 1,720 at yearend and 1,170 on Mar. 6. “Texas has been a major part of the slide, accounting for 58% of the fall in the US rig count since yearend,” it said.
“Production of goods consumed in the drilling process is falling along with the rig count, but demand for durable goods (pump, drill pipe, bits) can be down as much as 90% as parts are cannibalized from rigs not in service. Layoffs are widespread,” it added.
Houston, the nation’s foremost oil and gas center, is especially feeling the pain, said the Dallas Fed economists in their report. “Houston’s growth advantage over the rest of the nation during the past 5 years—oil and natural gas—has not only evaporated in the face of a global commodity bust but has turned into a definite liability. The coming year will see significant job losses in Houston, led by the energy sector,” the analysts said.
