Providing coverage of Alaska and northern Canada's oil and gas industry
January 2007

Vol. 12, No. 3 Week of January 21, 2007

Oil, gas prices down on warmer weather

EIA projects WTI average of $64.42 in ’07, compared to $66.02 in ’06; Henry Hub expected to rise, from $6.94 in ’06 to $7.06

Petroleum News

Warmer U.S. December weather led to a decline in crude oil and natural gas prices, the U.S. Department of Energy’s Energy Information Administration said Jan. 9 in its short-term energy outlook.

During December the spot price for West Texas Intermediate fell from $63.48 per barrel to $60.85 and the Henry Hub natural gas spot price dropped from $8.67 per thousand cubic feet to $5.67 per mcf.

The agency projects the price of WTI crude oil, which averaged $66.02 per barrel in 2006, to average $64.42 per barrel in 2007 and $64.58 per barrel in 2008. Henry Hub natural gas prices, which averaged $6.94 per mcf in 2006, are projected to average $7.06 in 2007 and $7.72 in 2008.

The WTI average price stayed at about $60 per barrel in the fourth quarter because the Organization of Petroleum Exporting Countries cut output in the quarter, with OPEC production averaging 700,000 barrels per day lower in the fourth quarter than in the third. Saudi Arabia accounted for half of the reduction.

WTI $64-$65 barrel in ‘07

The agency expects “a fairly close match between non-OPEC supply growth and growth in global oil demand,” with a modest increase in OPEC production capacity, keeping the market “fairly balanced and perhaps a little weaker in 2007.”

EIA said if OPEC continues “to alter production to keep inventories near normal levels” it expects the price of WTI to average between $64 and $65 per barrel in 2007.

Global oil demand is expected to rise by 1.5 million bpd in 2007, the agency said, an increase of 700,000 bpd above 2006 growth.

Non-OPEC supply is expected to grow by 1.1 million bpd reflecting new projects in the Caspian Sea, Russia, Africa, Brazil and the United States.

EIA expects OPEC spare capacity to increase following recent cutbacks, and said if its “demand and supply projections materialize as expected, OPEC surplus capacity will average over 2 million barrels per day, the highest level since 2002.”

The market will, however, still face short-term volatility due to weather, security-related disruptions or delays in non-OPEC supply growth, all of which could cause price increases.

Price decreases could occur if demand growth slows or “if Saudi Arabia decides to abandon production cuts in order to gain greater cooperation from other OPEC members.”

U.S. crude production, natural gas

EIA expects 2006 U.S. production to be about 5.14 million bpd, close to 2005 production levels, with growth to 5.31 million bpd in 2007 and 5.45 million bpd in 2008 as recovery continues from the 2005 hurricanes in the Gulf of Mexico and as new deepwater production starts up.

Warm weather has kept natural gas prices from rising in December and with 16 percent fewer heating degree-days than normal, the December average Henry Hub price was $6.97 per mcf.

Remaining months of the winter are expected to be only slightly warmer than normal, and the Henry Hub spot price is expected to remain below $7 per mcf for the winter.

The agency said natural gas prices will be sensitive to periods of sustained cold weather during the remainder of the winter, particularly in the Northeast and Midwest. The Henry Hub natural gas price averaged $6.94 per mcf in 2006 and is expected to average $7.06 per mcf in 2007 and $7.72 per mcf in 2008.

After a 1.3 percent decline from 2005 to 2006, the EIA expects natural gas consumption to grow 2.4 percent from 2006 to 2007.

Domestic production of dry natural gas rose 2.4 percent in 2006; only 1.9 percent growth is expected in 2007.

Net imports of natural gas are estimated to have fallen 5.5 percent in 2006 and are expected to fall by a further 1.1 percent in 2007, then increase by 7.8 percent in 2008, with a decline in pipeline imports from Canada tempered by increased liquefied natural gas imports. LNG imports are expected to increase to 0.8 trillion cubic feet in 2007 and to 1.1 tcf in 2008.

As of Dec. 29, working gas in storage was 3.074 tcf, 433 billion cubic feet above a year ago and 408 bcf above the five-year average. The EIA said it expects current high inventory levels to slowly return to historical averages.

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