Energy futures prices continued to climb Dec. 30, the last trading day of 2005, with the February contract for benchmark US light, sweet crudes gaining 72¢ to $61.04/bbl, up some 40% from price levels at the start of last year on the New York Mercantile Exchange.
The February natural gas contract inched up by 0.2¢ to close at $11.23/MMbtu in the thinly traded yearend session. "NYMEX natural gas prices have averaged about $9/MMbtu [in 2005], compared with an average of $6.177/MMbtu in 2004," said analysts at Enerfax Daily. "The US economy expanded at a 4.3% annual rate in the third quarter, the quickest pace since the start of last year," they reported Jan. 3.
J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. said, "The year 2005 marked the third consecutive year of outperformance for the energy sector. A robust global economic expansion created a favorable demand environment while supplies of both crude oil and natural gas remained generally tight, particularly following an unprecedented wave of disruptive hurricanes in the Gulf of Mexico."
Adkins anticipates that energy prices may weaken in the first half of 2006 but will exceed market expectations in the second half. "Longer term, today's elevated commodity price levels should be broadly sustainable," he said. He's confident that the Organization of Petroleum Exporting Countries "is prepared to (and will need to) defend a floor price near the $50 level in early 2006." The average price for OPEC's basket of 11 benchmark crudes increased by 57¢ to $53.47/bbl Dec. 30. It averaged a record $50.64/bbl for the year.
Adkins acknowledged a potentially "substantial upside" to Raymond James's current forecast for an average $58/bbl oil price in 2006 "if supply interruptions emerge." He said, "On the US natural gas side, we look for prices to average at approximately a 5.5:1 ratio with oil prices in 2006, as the weather-induced strength in late winter and hurricane-related tightness in the gas market spill over into 2006."
As 2006 began, production from the Gulf of Mexico remained suppressed by hurricane damage.
The US Minerals Management Service said 103 offshore platforms—12.6% of the manned platforms on federal leases in the Gulf of Mexico—were still inoperable Dec. 29 because of damage inflicted by Hurricane Katrina in late August and Hurricane Rita in late September. MMS said 410,618 b/d of crude and 1.95 bcfd of natural gas remained shut in at that time, equivalent to 27.4% of the crude and 19.5% of the natural gas normally produced daily from federal offshore leases in the gulf. Cumulative production lost during Aug. 26-Dec. 29 totaled 108.8 million bbl of crude and 560.8 bcf of natural gas, equivalent to 19.9% of the crude and 15.4% of the natural gas produced annually from those federal offshore leases.
The US Energy Information Administration reported the withdrawal of 162 bcf of natural gas from US underground storage in the week ended Dec. 23 (OGJ Online, Dec. 29, 2005). EIA said US gasoline inventories tumbled by 1.2 million bbl to 202.9 million bbl during that same week. Commercial US stocks of crude increased by 100,000 bbl to 322.6 million bbl in the same period, while distillate fuels fell by 900,000 bbl to 126.8 million bbl, with a drop in heating oil overcoming a slight rise in diesel.
US gasoline stocks usually increase during December, but US demand was still firmly above 9.2 million b/d for the fourth consecutive week. "Inventories are now below their 5-year average, with the situation looking particularly tight on the East Coast," said Paul Horsnell of Barclays Capital Inc., London, in a pre-Christmas report.
US demand for petroleum products increased from year-ago levels in December "by 0.8% for gasoline, 3.5% for jet [fuel], 6.3% for distillates, and 29.8% for residual fuel oil, with the monthly total among the main products set for an all-time high," said Robert S. Morris at Banc of America Securities LLC, New York. Increased distillate demand could "partially be attributed to fuel switching recently away from natural gas, with gasoline demand up 1%," he said. "With gasoline output now running 300,000 b/d below last year, and imports continuing to be needed to fill in the gap, the market balance looks precarious at a time of year when matters should look fairly flush."
Some analysts expect US production of gasoline to be pinched more in 2006 because of new low-sulfur requirements and the mandatory use of ethanol. "Exacerbating the concern regarding US gasoline supplies are new stricter environmental regulations now in effect, which are expected to reduce both domestic and imported gasoline supplies while refining capacity remains constrained," Morris said.
(Online Jan. 3, 2006; author's e-mail: [email protected])