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).
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: [email protected])