US sees sharply reduced oil and natgas prices

12 August 2008 19:16  [Source: ICIS news]

US sees oil and natgas prices diving over next 18 monthsWASHINGTON (ICIS news)--The US Energy Department sharply reduced its forecasts for oil and natural gas prices on Tuesday, saying that global crude prices should weaken over the next 18 months, and domestic US natgas production will increase substantially.


The department’s Energy Information Administration (EIA) said in its monthly outlook that falling oil prices mean that the average price for benchmark West Texas Intermediate (WTI) will fall to $119/bbl for this year, a drop of 6.3% from the administration’s 2008 average price forecast of $127/bbl just a month ago.


For 2009, the administration is forecasting an average price of $124/bbl, a cutback of nearly 7% from the July energy outlook estimate of $133/bbl for next year.


However, even the new lower average price forecasts of $119/bbl for this year and $124/bbl for 2009 are still considerably higher than the average $72/bbl price recorded just last year.


Only a month ago the EIA said it expected oil and gas prices to continue to rise, but now the administration indicates that it expects global crude prices will continue to decline - up to a point.


“Prospects for improved oil market fundamentals over the next 18 months point to an easing in the market balance and price weakness over the near term,” the EIA said in its short-term energy outlook (STEO).


“The combination of slower US and global oil consumption growth, increased production capacity for crude oil and natural gas liquids in OPEC countries beginning in the third quarter 2008 and continuing through 2009, and higher non-OPEC supply, raises the prospect for a drop in demand for OPEC crude oil and an increase in surplus capacity,” the administration said. 


“Downward price pressures would increase if the economic slowdown proves deeper or longer than expected, and if higher prices lead to lower consumption and lower demand for OPEC crude than currently anticipated,” EIA added.


However, the administration does not expect anything like an oil price freefall.


“There is also a risk that any weakness in oil prices could be minimal or short-lived, especially if consumption growth exceeds current expectations or if oil production capacity expansion plans in either OPEC or non-OPEC nations turn out to be lower than expected,” the EIA outlook said. 


“Supply risks in Iraq, Nigeria and Iran, as well as threats of hurricanes over the near term, continue to influence market expectations. In addition, OPEC production behaviour that would lead to voluntary production cuts aimed at keeping inventories fairly tight would also limit downward price pressure.”


In natural gas - which is a crucial feedstock and energy source for the US chemicals industry - the EIA said it now expects the Henry Hub spot price to average $10/m Btu this year, a decline of 15.7% from the administration’s $11.86/m Btu estimate of last month.


The outlook for average US natural gas costs in 2009 is even lower, with EIA saying that next year’s Henry Hub spot price is expected to average $9/m Btu, a 22.5% reduction from the outlook estimate of $11.62 a month ago.


The administration indicated that expected sharp increases in production of US domestic conventional and unconventional shale gas are behind the considerable decline in its gas price forecast for this year and next.


EIA said it expects total US marketed natural gas production is expected to increase by 8% this year and by nearly 4% in 2009. Just last month, those growth estimates were only 6.4% and 1.6% respectively.


After the EIA’s earlier short-term energy outlook on 8 July, independent US natural gas producers announced major developments in shale gas discoveries and production.


“Robust growth from unconventional [shale] production basins in the Lower-48 onshore region is expected to continue,” the administration said.


US marketed natural gas production from the Gulf of Mexico next year is expected to increase by 3.5%, the EIA said, revising its estimate upward from last month’s forecast of a 2.5% boost in Gulf output in 2009.


“Sustained drilling activity is expected to lead to [natgas] production growth next year of 3.9% in the Lower-48 onshore region,” the administration said, a forecast that is nearly three times higher than last month’s prediction of a 1.4% rise in domestic gas production in 2009.


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By: Joe Kamalick
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