EIA revises first quarter crude oil price upward

Petroleum News

The U.S. Department of Energy’s Energy Information Administration has revised its estimated first quarter West Texas Intermediate oil price upward by $2 from February. The new estimate, about $48.70 per barrel, is some $13 per barrel higher than the first quarter of 2004, the agency said March 8 in its short-term forecast.

EIA said it is now projecting “that WTI prices are likely to remain near the high-to-mid-$40s (or higher) per barrel range throughout 2005-2006.”

Prices are expected to be sensitive to incremental supply tightness and EIA said real or perceived imbalances in light product markets could cause light crude oil prices, such as WTI, “to increase to well above $50 per barrel, as has recently occurred.”

Both Organization for Economic Cooperation and Development countries and the United States have oil inventories near the middle of the historical range, EIA said. OPEC has said it will reconsider market conditions at its March 16 meeting, but the EIA said its assumption is OPEC will not cut production, “given high oil prices and tight supply.”

EIA said “petroleum demand growth is likely to be the key factor for oil markets in 2005,” with world demand growth expected to average about 2.5 percent per year during 2005 and 2006, “a rate that exceeds expected growth in non-OPEC supply and global refinery capacity.” The 2.5 percent growth rate is down from 3.4 percent growth in demand during 2004, and EIA said the lower growth in global oil demand is attributed to high oil prices and a slower expected rate of oil demand growth in China.

U.S. petroleum demand grew 2.4 percent in 2004, averaging 20.5 million barrels per day, with the fastest growth, 3.3 percent, in distillate use, “buoyed by substantial growth in industrial activity and on-highway diesel fuel consumption.” U.S. motor gasoline use, about half of U.S. petroleum demand, increased only 1.4 percent in 2004. Overall U.S. petroleum demand is expected to grow 1.9 percent in 2005-06.

Henry Hub down in 2005

“Still,” the agency said, “current spot prices remain well above previous expectations despite recent demand weakness and very high gas storage levels.”

Working gas storage at the end of February is estimated at 1.57 trillion cubic feet, 36 percent higher than a year ago and 30 percent higher than the five-year average. Natural gas prices are expected to ease over the next several months with the heating season almost over and ample gas in storage.

“Nevertheless, with crude oil prices expected to remain well above $40 per barrel through 2006, and tight natural gas supply/demand conditions over the same period, Henry Hub prices are expected to remain relatively high, averaging about $5.80 per mcf this year and $6.60 in 2006.”

The U.S. demand for natural gas is projected to grow by 2.2 percent in 2005, the EIA said, down from a 3 percent growth projected last month. The drop is attributed to first-quarter overall heating degree days that have been lower than normal and high prices.

EIA said domestic natural gas production is now expected to increase by only 0.5 percent from the 2004 level, rather than by 1.6 percent as it had previously projected, “despite high gas-directed drilling rates,” although a 3.2 percent demand increase is projected for 2006 “due largely to weather-related factors and continued strength in gas-intensive industrial production.”

Domestic natural gas production in 2005 is now expected to increase by 0.5 percent from the 2004 level rather than by 1.6 percent as previously projected, despite high gas-directed drilling rates.