EIA pegs somewhat weaker oil prices to slower growth, good inventories

Natural gas storage levels reach lowest ever March 31; spot prices expected in $4 to $5 range as energy use competes with storage needs

Petroleum News Alaska

The Energy Information Administration has reduced its base case assumptions for real economic growth in the United States this year and next, with the economy now expected to grow at 1.9 percent this year and by 3.4 percent in 2002.

The agency said OPEC’s announcement of a second round of production cuts this year has offset the weaker growth outlook and upward revision in industrialized country oil inventories at the end of 2000, and somewhat weaker oil prices are now expected in the short term. But the EIA projects a return to $30 a barrel levels by the end of the year.

“Crude oil and gasoline inventories remain below normal in the United States and are expected to remain so through the driving season and into the fall,” the EIA said, and that will produce some price volatility.

The agency expects minimal or no unplanned refinery outages or distribution bottlenecks moving into the driving season — but only a slight decline, averaging about 6 cents a gallon, in gasoline prices. Short-term supply squeezes and “price flare-ups in regional markets” are possible because of relatively low gasoline production over the winter, high costs for reformulated gasoline blending components and sub-normal inventories going into spring. Generally tight market conditions and increased demand are expected to keep producer margins and consumer prices relatively high.

Even with a slight decline in summer gasoline prices they are still expected to remain at an average at the second highest level of all time in nominal terms, the second-highest in real terms since the summer of 1990.

EIA said “natural gas in underground storage reached the lowest levels recorded by EIA at the end of the heating season (March 31),” setting the stage for continued high spot and wellhead prices sensitive to variations in summer weather creating high electricity demand and to the competition for storage gas.

The agency believes that unless there is an unexpected increase in production or sharper-than-anticipated downturn in industrial activity, natural gas spot prices will continue in the $4 to $5 range through the end of summer.