Government reports track recession's impacts on oil and gas sector

A continuing worldwide economic decline is taking its toll on the US oil and gas industry as demand continues to weaken and prices stay low, two separate federal government reports said.

A continuing worldwide economic decline is taking its toll on the US oil and gas industry as demand continues to weaken and prices stay low, two separate federal government reports said on March 10.

The US Energy Information Administration increased its global oil demand decline forecast for 2009 by 200,000 bbl a day from its February Short-Term Energy Outlook to nearly 1.4 million b/d in its latest monthly forecast. The change reflects anticipated reduced worldwide economic activity, with gross domestic product growth (oil-weighted) expected to fall 0.8% during the year, compared to an anticipated 0.1% decline in February's forecast.

"EIA's projection for 2009 global oil consumption is now 3 million b/d lower than it was in the September 2008 Outlook. World oil consumption is expected to rebound in 2010, growing by 900,000 b/d, in response to an economic recovery which is projected to rebound at the end of 2009. However, this revised projection for 2010 is 300,000 b/d lower than in last month's forecast due to the projected slower pace of recovery in the global economy," it said.

The timing and pace of a global economic recovery will largely determine the future direction of world oil prices, it continued. EIA said that after averaging more than $100/bbl in 2008, worldwide crude oil prices are expected to be less than half that amount (an average $42/bbl) in 2009 and climb somewhat to an average $53/bbl in 2010, slightly less than the estimates it issued in February.

"The US economic downturn is the principal cause for the decline in domestic natural gas consumption, particularly in the industrial sector where it is projected to fall by 6% in 2009, which in turn has led to lower natural gas prices," EIA said in its latest STEO. It said that it expects the Henry Hub spot price to decline from an average of $9.13 per thousand cubic feet in 2008 to about $4.70/Mcf in 2009 before increasing in 2010 to an average of almost $5.90/Mcf.

Houston is hit hard

The nation's foremost oil and gas center is feeling the pain, another group of federal economic analysts said. "Houston's growth advantage over the rest of the nation during the past five 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 Federal Reserve Bank of Dallas said in its latest Houston Economic Update.

It said that the West Texas Intermediate crude price has fluctuated between $34 and $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, the Dallas Fed economists said. "A massive buildup in US crude inventories pushed their levels far outside historical ranges," they added in their report.

Very cold weather in Chicago and key East Coast markets held gas prices in place for much of the winter, "but as weather has moderated and winter ends, prices have fallen by more than $1/Mcf to near $4/Mcf, the lowest level in over six years. Rising domestic production, Canadian imports and very weak industrial demand combined to pull prices down in the absence of frigid temperatures," it continued.

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 that the number of rigs making hole peaked during September at 2,031 before dropping to 1,720 at the end of the year and 1,170 on March 6. "Texas has been a major part of the slide, accounting for 58% of the fall in the US rig count since year-end," 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.

Downstream trends

The Dallas Fed report said 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."

EIA, which replaced its petroleum products classification with a new liquid fuels category this month (which also includes natural gas liquids, biofuels and liquids derived from other hydrocarbon sources such as coal and gas), said that it expects US 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.

It expects regular grade retail gasoline prices, which averaged $3.26/gal in 2008, to drop to an average $1.96/gal this year before rebounding slightly to an average $2.18/gal in 2010. "The monthly average price 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. 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 said.

It 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.

EIA's latest monthly forecast indicated that total US marketed natural 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 March 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 billion cubic feet per day in early 2009, then declines during the second half," it 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."

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