World oil prices face long haul to shake off historic lows

The world oil price collapse, which has crushed the budgets of even the largest oil companies, is unlikely to be reversed any time soon, the Energy Information Agency of the U.S. Department of Energy has forecast.

Even by the end of 2000, the average price U.S. refiners pay for imported oil (the benchmark for the world crude price) will be up only slightly at $14.25 per barrel, or less than $4 above the average January price, the EIA said Feb. 8.

The assumptions underlying that forecast are:

• Slight growth in Asian demand (which fell by 70,000 barrels per day in 1998) of 250,000 barrels per day in 1999 and 500,000 barrels in 2000.

• Increases in Iraqi exports, which will likely be held to 450,000 barrels per day over the next two years after rising by 1.6 million barrels per day over the last two years.

• Normal weather, particularly in the winter.

• Growth in OPEC and non-OPEC production of only 400,000 barrels per day (almost entirely from Iraq), which is about one-quarter of the normal increase.

The EIA said “some of the factors that would enhance the likelihood of oil prices rising in the short run have faded,” including a warmer-than-usual January in the United States and relatively high U.S. petroleum stocks of about 50 million barrels.

It said that “while the general tendency toward tighter net supply conditions continues to frame our short-term outlook, the risk has increased that prices may remain lower than previously projected for the near term.”

On the world supply front, the EIA expects the largest growth from 1997 to 2000 to come from Iraq, the rest of OPEC and Latin America, although it said most of the increases have already occurred.

Over the same period, Asian (excluding China) demand growth is expected to be only one-sixth what it was in the 1993-1996 period, because of the Asia economic crisis. The largest demand growth is forecast to be North America (primarily the United States). China is expected to add about 1 million barrels per day, while Latin America and Western Europe each add another 750,000 barrels per day.

In projecting U.S. energy prices, the EIA said:

• Heating oil prices are expected to dip slightly in 1999, given the lower crude oil price path and the mild January weather on the East Coast, but are projected to rebound by about 10 cents per gallon next winter, assuming “normal” weather.

• Pump prices for motor gasoline can be expected to rise as the driving season begins from their current average of 94 cents to 98 cents per gallon, the lowest annual inflation-adjusted prices on record. On an annual basis, 1999 retail prices should remain more or less flat, but in 2000 should rise by 8 cents per gallon.

• Natural gas prices above $2 per thousand cubic feet are not expected until the fourth quarter. Prices this winter are expected to average about 17 percent less than a year ago. In 2000, however, prices at the wellhead are projected to increase by 17 percent and are not likely to drop below $2 for the entire year.

The report said that although U.S. petroleum demand rose only 0.3 percent in 1998 it is expected to grow by an average of more than 2 percent per year during the 1997-2000 period. Part of last year’s smaller-than-expected increase was attributed to the warm weather in the first and last quarters of the year.

Much of the 3 percent growth predicted for 1999 results from higher growth in motor gasoline demand, an assumed return to normal weather patterns, and a projected recovery in jet fuel markets. A slowdown in petroleum demand growth in 2000 is based primarily on a slowing economy and weather patterns similar to 1999.

Overall, the EIA said, production growth for U.S. natural gas is expected to be minimal due to exploration and production budgets being slashed for 1999, reduced capital spending, and normal production declines. The outlook calls for natural gas storage on March 31 to be 234 billion cubic feet, or 4.2 percent above the year-ago level.

Details of this forecast are on the Internet at: http://www.eia.doe.gov/emeu/steo/pub/contents.html. An update to the Short-Term Energy Model for February 1999 may be found at: http://www.eia.doe.gov/emeu/steo/model/stem.html.