MARKET WATCHEnergy prices fall with worries of eroded demand

Oct. 14, 2005
Energy prices fell Oct. 13, ending a brief rally as traders once more focused on the apparent erosion of demand due to the high cost of crude.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 14 -- Energy prices fell Oct. 13, ending a brief rally as traders once more focused on the apparent erosion of demand due to the high cost of crude.

Both the US Energy Information Administration and Paris-based International Energy Agency cited consumer reaction to high fuel prices as they lowered their forecasts of oil demand growth in 2005 (OGJ Online, Oct. 13, 2005). However, both claimed the price-driven demand slowdown will be temporary, with increases in both US and global demand growth in 2006.

EIA said commercial US crude inventories increased by 1 million bbl to 306.4 million bbl in the week ended Oct. 7, while gasoline stocks fell by 2.7 million bbl to 192.8 million bbl. Distillate fuel inventories dropped by 3.4 million bbl to 124.6 million bbl in that same period (OGJ Online, Oct. 13, 2005).

US automobile dealers reported sharp declines in September sales of less economical SUVs, which some see as another sign of consumer unease about energy prices. But SUV sales were strong in July and August with dealer discounts, said Paul Horsnell of Barclays Capital Inc., London. He also noted the US Department of Energy's newly released fuel economy guide for 2006 model vehicles lists the Dodge Ram 1500 pickup as the least efficient of all at 9 mpg in average city conditions. "Dodge sold more Ram pickups in September than they have in any month since 1999," Horsnell said. "It is a bit disingenuous to infer a major change in gasoline demand on the basis of a single month's sales figures."

Although demand data warrant careful attention, said analysts at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., they cautioned "against extrapolating too much from it given that September historically has been one of the weakest periods for [energy] demand and, this year, was impacted by two large Gulf storms." They said, "With 11% of US refining capacity (1.9 million b/d) currently shut down due to hurricane damage and demand expected to increase seasonally during [the fourth quarter], refining margins should stay high through at least 2006."

Slow recovery
The US Minerals Management Services said Oct. 14 that crews still have not returned to 232 platforms and 2 drilling rigs in the Gulf of Mexico nearly 3 weeks after Hurricane Rita hit the Gulf Coast on Sept. 24. MMS said 67.2% or more than 1 million b/d of crude production from the gulf plus 56.5% or 5.6 bcfd of natural gas are still shut in. Cumulative offshore production lost since Aug. 26, when Hurricane Katrina was threatening gulf operations, now stands at 57. 6 million bbl of crude and 288.9 bcf of gas, the equivalent to 10.5% and 7.9%, respectively, of the annual production of oil and gas from the Gulf of Mexico.

EIA officials estimate that at least 2 bcfd of offshore gas production will remain shut in through December and that the Gulf of Mexico will not resume full production until March.

The Louisiana Office of Conservation said 691.7 MMcfd of natural gas production has been restored to wells onshore and in state waters in 38 parishes. That is 30.9% of previous production prior to the two hurricanes, with 45.8% of the wells in that region still shut in and no information at all on 31.7% of the wells.

Meanwhile, UBS Securities LLC, New York, increased its average composite spot natural gas price forecast to $8.60/MMbtu from $8 MMbtu in 2005, $9.50/MMbtu from $8/MMbtu in 2006, and $9/MMbtu from $7.75/MMbtu in 2007 because of the hurricane damage to gulf infrastructure and production.

Ronald J. Barone, a managing director of equity research with UBS, said: "The American Gas Association expects a 50% increase in heating bills this winter season; others foresee spikes of 100% to 200% based on previous spikes during peak winter days. If this is the case, many experts predict that even slight conservation efforts on the part of consumers could create enough demand destruction to heavily offset the supply shortfalls. A modest conservation of 5%, for example, would reduce normal demand by 500 bcf over the course of the winter season."

In addition to the physical damage inflicted on Gulf Coast operations by the two hurricanes, Barone said, "We expect a longer-term impact with respect to industry staffing levels given the already tight labor market. There are doubts about whether some oil and gas workers will return to Louisiana, which could push up labor costs further."

In a move important to oil product supply, Chevron Corp. restarted its 325,000 b/d refinery at Pascagoula, Miss., which was shut down prior to Hurricane Katrina. The hurricane damaged the refinery's marine terminal, cooling towers, and other equipment. However, the facility was not flooded because of a perimeter dike installed after Hurricane Georges in 1998.

Energy prices
The November contract for benchmark US light, sweet crudes fell by $1.04 to $63.08/bbl Oct. 13 on the New York Mercantile Exchange. The December contract lost $1 to $62.61/bbl. Gasoline for November delivery plunged by 6.97¢ to $1.76/gal on NYMEX. Heating oil for the same month dropped 1.88¢ to $2/gal.

The November natural gas contract plummeted by 42.1¢ to $13.10/MMbtu on NYMEX, "pressured by a steep sell-off in crude oil and mild weather forecasts for the next week," said analysts at Enerfax Daily.

In London, the November contact for North Sea Brent crude declined by 43¢ to $60.14/bbl on the International Petroleum Exchange. Gas oil for November was down by $6 to $605.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes slipped by 14¢ to $55.23/bbl Oct. 13.

Contact Sam Fletcher at [email protected].