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Petroleum News: EIA forecasts increasing oil, natural gas prices

Vol. 12, No. 33  Week of August 19, 2007

The U.S. Department of Energy’s Energy Information Administration said Aug. 7 that significant crude oil price increases over the last two months are “the result of increasingly tighter world oil markets.”

There is increased demand for Organization of Petroleum Exporting Countries oil, the agency said, but despite higher prices, “OPEC officials have expressed a reluctance to raise production, pointing to high U.S. crude stocks and attributing high prices to refining bottlenecks, geopolitical tensions and fund speculation.”

The refiner acquisition cost for crude oil averaged $61.60 per barrel in May and is projected to average $73.50 per barrel in August. The annual average RAC price was $60.23 per barrel in 2006 and is expected to average $64.86 per barrel this year and $68.75 per barrel in 2008.

West Texas Intermediate crude oil is expected to average $67.60 per barrel in 2007 and $71.25 per barrel in 2008.

The Henry Hub natural gas spot price is expected to average $7.45 per thousand cubic feet this year, up 52 cents per mcf from the 2006 price. The 2008 price is expected to average $8.06 per mcf.

Oil prices continue firm because of production restraint by members of OPEC, combined with rising consumption and moderate increases in non-OPEC supply, the EIA said.

Lower production projection since July

The agency said the global oil balance has tightened since July “due to lower projections for world oil production” combined with a larger than expected projected stock draw in the second half of the year by Organization for Economic Cooperation and Development countries.

“This situation contrasts with conditions last year, when prices weakened in the second half due to slow consumption growth, rising global inventories and the absence of hurricane-related oil supply losses.”

EIA said its projection for OPEC crude oil production in the third quarter has been lowered by about 300,000 barrels per day from July to 30.5 million bpd, reflecting “an assumption that OPEC will delay increasing output from the third quarter of this year to the fourth quarter.”

Production from Iraq and Nigeria has been constrained by militant attacks. At the end of July 641,000 bpd of Nigerian oil was shut-in, some 127,000 bpd less than at the end of June.

OPEC will reexamine its output levels at a meeting planned for Sept. 11.

“The low level of surplus OPEC oil production capacity, which is primarily in heavy crude oil, remains a key reason for the continued tight market conditions,” EIA said. OPEC surplus capacity was 2.4 million bpd in the second quarter, most of that in Saudi Arabia, Kuwait and the United Arab Emirates. EIA said surplus capacity is expected to remain low in 2008, “as expected increased demand for OPEC oil more than offsets expected capacity gains in a few countries, continuing to leave the market vulnerable to unexpected supply disruptions.”

Any downward price impact the surplus capacity might have is reduced by OPEC’s apparent unwillingness to use available surplus crude capacity.

Natural gas: onshore growth offsets Gulf declines

Federal Gulf of Mexico natural gas production declined some 2.3 percent in the first half of 2007, compared to the same period a year ago; Lower 48 onshore natural gas production increased by 3.1 percent over the same period. On an annual basis, Gulf production is expected to decline by 4.2 percent in 2007, while Lower 48 onshore production is expected to increase by 1.6 percent.

Total U.S. dry natural gas production is expected to rise 0.8 percent this year and 1.5 percent next year.

Liquefied natural gas imports for the first half of the year totaled 460 billion cubic feet, some 53 percent above the same period last year. EIA is forecasting a decline in LNG imports for the remainder of the year “as more cargoes are expected to be directed to European and Asian markets.”

European prices have risen in recent weeks, the agency said, and “are now more competitive with U.S. market prices.”

Total LNG imports in 2007 are expected to reach 850 bcf, a record high.

Henry Hub spot prices reflect an inactive hurricane season, storage inventories that are up over the same time last year and mild summer weather in the U.S. West South Central region, where some one-third of electric power is from natural gas.

The hurricane season runs through the end of November and EIA said “current price projections remain vulnerable to potential storm-induced disruptions during that period.”

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