MARKET WATCHDemand reductions undercut energy prices

Sam Fletcher
Senior Writer

HOUSTON, Mar. 20 -- Energy prices fell Mar. 17 as the Organization of Petroleum Exporting Countries reduced its 2006 projection of global oil demand growth by 110,000 b/d to 1.46 million b/d.

Global demand is expected to average 84.5 million b/d of oil this year, with OPEC supplying 28.4 million b/d. OPEC ministers earlier this month voted to maintain their current production quota of 28 million b/d of oil until the group's next meeting June 1 in Venezuela. However, the US Energy Information Administration said the 10 OPEC members affected by that quota actually produced 27.9 million b/d in February.

The International Energy Agency on Mar. 14 reduced its 2006 global oil demand growth forecast by 290,000 b/d to 1.49 million b/d, or 1.7%, citing the market effect of high prices for petroleum products in Southeast Asia (OGJ Online, Mar. 14, 2006).

Meanwhile, Iraq said its oil exports increased in early March by 2% to 1.46 million b/d as weather improved at its Basra export terminal in the south. Iraqi officials said production problems had reduced production from its northern oil fields to 245,000 b/d from 400,000 b/d in February. Its northern production was piped to Iraqi refineries or put in storage, with no exports through Iraq's northern pipeline to the export terminal in Ceyhan, Turkey.

Iran's offer to talk to US officials apparently eased energy traders' fears of the growing diplomatic crisis over Iran's nuclear program.

Earlier in the week, administration of President George W. Bush said in a national security strategy report that Iran's nuclear ambitions are the biggest challenge to the US. A White House spokesman said the administration has not ruled out the preemptive use of force to prevent a nuclear attack by Iran. Subsequently, "Japan has begun to reduce its imports of Iranian oil and seek other sources to diversify its dependence on Iran," said Robert S. Morris at Banc of America Securities LLC, New York.

Natural gas
US natural gas production from publicly traded companies fell by 5.9% in fourth quarter 2005, primarily because of hurricane-related damage to Gulf Coast production and transportation facilities. However, said J. Marshall Adkins at the Houston office of Raymond James & Associates Inc.: "If we try to remove the hurricane impact, it appears that US gas production would have been up for the first time in years."

But that took an immense effort. As a result, Adkins said, "The industry is now at virtually 100% utilization of onshore gas rigs, and gains in rig counts and drilling efficiencies have also been significant over the past 3 years. Going forward, 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."

Adkins expects US gas supply to remain constrained for years to come. "Although we see gas prices remaining at fairly depressed levels in 2006 given the extraordinarily warm 2005-06 winter and consequently high levels of gas in storage, our long-term bullish North American energy thesis remains fully intact," he said. "Much like in the 1970s, when oil production continued to stagnate, regardless of how many rigs were drilling, we think we are at a similar crossroads in the US gas supply picture. 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."

Energy prices
The April contract for benchmark US light, sweet crudes lost 81¢ to $62.77/bbl Mar. 17 on the New York Mercantile Exchange. The May contract fell by 90¢ to $64.20/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 80¢ to $62.78/bbl. Heating oil for April delivery lost 3.12¢ to $1.78/gal on NYMEX. Gasoline for the same month declined by 1.43¢ to $1.86/gal. The April natural gas contract dropped 21.4¢ to $7.05/MMbtu after EIA reported record high gas storage levels.

In London, the May IPE contract for North Sea Brent crude lost 95¢ to $63.26/bbl. However, April gas oil jumped by $10.25 to $562.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by $1.02 to $58.47/bbl on Mar. 17. So far this year, OPEC's basket price has averaged $57.54/bbl, up from $50.64/bbl for all of 2005.

Contact Sam Fletcher at [email protected]