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November 2008

Vol. 13, No. 47 Week of November 23, 2008

EIA cites stagnation, cuts oil price forecast

In October the 2009 West Texas intermediate crude oil price was projected to average $112 a barrel — in November that number was dropped to $63.50, just above half of the October projection.

That’s how much the world changed in a few weeks in the view of the U.S. Department of Energy’s Energy Information Administration.

EIA said its November price projection is based on “world-wide economic stagnation,” which the agency expects will keep oil markets weak through next year.

Prices are expected to average $101 per barrel this year, EIA said Nov. 12 in its short-term energy outlook. “Under the current economic assumptions and assuming no major crude oil supply disruptions, WTI prices are expected to average $63.50 per barrel in 2009,” the agency said, down from its $112-per-barrel October forecast for next year.

EIA blamed a drop in demand: “The current U.S. and global economic downturn has led to a decrease in global energy demand and a rapid and substantial reduction in crude oil and other energy prices. As a result, projections for both energy demand and prices are considerably lower than last month’s ‘Outlook,’” the agency said. “Further deterioration in actual or expected global economic growth as a fallout of the current financial crisis may lead to even lower prices.”

EIA said world real gross domestic product growth, which was 4 percent in 2006 and 2007, is expected to slow to some 2.5 percent this year and to only 1.8 percent next year; this compares to an October forecast of 3 percent growth for this year and 2.8 percent for 2009. The agency said previous lows for world economic growth were 0.3 percent (1982), 1.7 percent (1993) and 1.5 percent (2001).

In the U.S., real GDP has been lowered to 1.3 percent growth for this year (from 1.8 percent in October) and “is projected to decline by 1.4 percent in 2009” (compared to 0.8 percent growth projected in October).

Slowing global economic growth — and high prices in the first half of this year — have “caused oil demand growth to slow dramatically,” EIA said.

The Organization of Petroleum Exporting Countries has reduced target production and EIA said price levels “will primarily depend on the magnitude and duration of the economic downturn as well as OPEC and non-OPEC behavior.” The agency’s price projection “assumes that the OPEC production cut may limit, but not reverse, the recent sharp fall in oil prices.”

Prices are expected to remain relatively flat, averaging $60 to $65 per barrel in 2009. “The condition of the global economy is expected to remain the most important factor driving world oil prices,” EIA said.

Natural gas also affected

EIA said the economic downturn “is also lowering current and expected natural gas prices.” The agency projects the Henry Hub natural gas spot price to average $9.27 per thousand cubic feet this year, and drop to $6.82 per mcf next year. In October EIA projected that the Henry Hub would average $8.17 per mcf next year.

The average Henry Hub spot price in October was $6.94 per mcf, 94 cents an mcf below the September average.

The “dramatic shift in expectations for natural gas prices” is driven by the slowing economy, continued growth in natural gas production and the decline in oil prices, the agency said.

“Beyond the winter, the weak economy and continued growth in onshore natural gas production are expected to keep prices relatively low.”

—Petroleum News






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