Short Term Energy Outlook Overview - from the EIA (US DOE Energy Information Administration)

Short Term Energy Outlook Overview - from the US DOE’s Energy Information Administration

EIA’s demand, supply and cost projections have been updated once again with the latest release of their monthly Short Term Energy Outlook just released on Tuesday, May 9th. Looking back just slightly to the April report, the price of West Texas Intermediate (WTI) crude oil was projected to average $65 per barrel in 2006 and $61 in 2007. Now in May those numbers have been adjusted higher to $68 per barrel for both 2006 and in 2007 and these numbers will most certainly change again in the coming months.

From the last two monthly reports comes a sustained warning about the possibility for highly variable market activity. “With another active hurricane season possible this year, news of any developing hurricanes and tropical storms with a potential to cause significant new outages could add to volatility in near-term prices in the latter part of the summer”.

“While rising crude oil prices have slowed world petroleum demand growth, world consumption nevertheless rose by 3.8 million barrels per day (bbl/d) over this period. Both the inability of world oil producers to increase production capacity to meet growing demand and growing concern about the security of supplies have contributed to rising crude oil prices. The prospects for significant improvement in the world petroleum supply and demand balance appear to be fading. While U.S. production in 2006 will grow with recovery from the hurricanes, only moderate increases in OPEC and other non-OPEC production and capacity are expected. Steady and continued growth in world oil demand will likely combine with only modest increases in world oil production capacity leaving little room to increase production in the event of geopolitical instability. Crude oil prices will remain high through 2007.” This situation will also provide a level of support for natural gas prices, which moves somewhat in line with the general energy complex. More details can be found in the full report at http://www.eia.doe.gov/steo .

Thankfully however, we witnessed exceptionally low heating demand in January 2006, a situation we can only hope for again next year. This anomaly has allowed huge amounts of natural gas to be stored and has resulted in the following projection from the May EIA report - “The expected average for 2006 for Henry Hub spot prices of $8.11 per thousand cubic feet (mcf) is down about $0.90 from the 2005 average. For 2007 the Henry Hub average price moves back up to more than $9 per mcf, assuming sustained high oil prices, normal weather, and continued economic expansion in the United States.”

12 month strip natural gas prices are hovering just under $9/mcf and are likely to move significantly one way or another depending on the severity of the summer cooling and hurricane seasons. Prices for the coming winter are high compared to the front months of June and July…enough so that some large users are buying gas at current prices from the front months to profit from selling it for winter use to take advantage of the tremendous spread.

Pricing

After Katrina, Rita, the market calming of early 2006 and the recent spike in April due to geopolitical tensions, the markets look like they are trying to act according to the more traditional supply and demand forces as opposed to speculation over issues such as the US invading another country. With ample supplies of crude oil and natural gas, where storage levels are 60% higher than the five year average market rates have been and are still exceptionally cheaper than locked-in fixed rates of the past few months. Today’s forward prices are looking quite attractive compared to late last year and there may still be some more downside wiggle room before the summer heat and the first storms of the season hit.

Predicting prices going forward is always a recipe for disappointment but there has been at least some certainty coming from the market as to the approximate cost premium currently placed on a barrel of oil…which now stands at roughly $15. Take away all the fear and we have $50 - $55/bl oil and while its not the $30/bl its also under $70.

One factor affecting global fossil fuel supplies is increasing interest rates that may eventually help to slow economic growth…which may lead to slower demand projections than recent forecasts. The International Energy Agency has recently stated prices aren’t sustainable by indicating that “The high oil prices are not consistent with the long-term trend just because they are much higher than the margin costs of an additional barrel”.

Then we have the 27 year letter from Iran to the US which has also provided some much needed information to the futures traders, who base their activity on speculative events such as when the US will attack other countries and when those other countries will cut off their life line of oil revenues. This issue has been a sticking point in the debate over where the fundamentals of oil really are bullish or bearish. Aside from the attacks in Nigeria, the residual damage to Gulf production and refining capacity and the nationalist energy control activities in Central and South America, we still see the growing global demand for oil and its products as well as for natural gas, regardless of whether that growth rate is slowing or not. Global production capability has not been significantly increased in nearly 20 years and there is a significant need for refinery capacity to come on line very soon. Both of these issues are keeping the prices inflated and they will likely do so for the next few years.

New production and refining capacity will save us from the recent price shocks…we just won’t be saved until 2009 or so. Hold onto your hybrid cars until then, at which time you may ditch them for the Hummer you’ve all been dreaming about getting a real tax break on.

What about Power?

Since most NE US power is fueled by natural gas, we will continue to be at the mercy of the liquid and gaseous fuel market. Grid capacity issues are scheduled to be a problem for NYC around 2009 – 2010 and the only real solution as most analysts see it today is to shut off the a/c as well as the lights. A power plant takes about 6 years from the onset of designing, siting and permitting, then to eventual construction. Since a projected shortfall is slated for 2009 or 2010 and it is now 2006 it doesn’t take an engineer to figure out we may already be in a bit of a pickle.

Rules and Regs Update

April 2006 began the second year of Con Edison’s most recent rate increase and as such, T&D rates remain unchanged. According to the settlement agreement, they will increase rates again next April by about 6.7% for commercial customers.

If you are a large Time of Day (TOD) customer not being supplied commodity power by a Third Party Supplier (TPS) then congratulations!, you are now being served at Con Ed’s new Mandatory Hourly Pricing (MHP) rate. You may choose to switch to a TPS which will provide for more options other than the NYISO Day-Ahead Hourly Pricing of the MHP. Please contact Michael at Great Forest if you would like more information about your best cost supply options going forward.

Con Ed’s steam rate increase proposal ($115 million in the first year) is being hashed out right now and a settlement is likely during the summer. Stay tuned as this rate case may have an impact on power prices.

Events and Other Items of Interest

Northeast Utilities, Select Energy’s parent company, announced on May 2 that Select Energy’s retail marketing business (including Select Energy New York, Inc.) is being sold to Amerada Hess Corporation. The sale is expected to close by June 1, 2006.

"Targeted" Demand Side Management Program:

Pay close attention to the RFPs coming out of Con Edison as well as from NYSERDA that seek to alleviate future grid capacity and reliability constraints. One of Con Ed’s goals is to implement 123 MW of load reduction over several years. For more information, please go to: http://www.coned.com/sales/business/targetedRFP2006.asp request for proposals (RFP) and the DSM Agreement.

Monday morning, May 15th, 2006, the Manhattan Chamber of Commerce and ConEdison Solutions will be presenting a free breakfast seminar to inform customers about a "targeted" Demand Side Management Program opportunity for electric customers in a specific geographic zone on the west side of Manhattan, generally between 25th and 59th Streets west of 5th Avenue. (More specific details on the location are specified below, but even those details only represent an approximate definition of the targeted area.) If you are using electricity at a location within this area and have not yet been approached by one of the three vendors marketing such Demand Side Management program services in this area, you might be interested in attending this meeting to secure further information.

More information on this event, can be found at: http://www.manhattancc.org/marketplace/events/Eventdetail.cfm?QID=8886&ClientID=11001

A worthy read from Reuters:

By Souhail Karam

RIYADH, May 9 (Reuters) - Top exporter Saudi Arabia said on Tuesday it expected oil prices, just off record highs, to hold firm "this decade" and reiterated it was willing to pump more crude to markets if needed.

Oil Minister Ali al-Naimi also said OPEC, the bulk of whose spare capacity lies with Saudi Arabia, will be able to meet expected growth in global crude demand but that the world will face a refining capacity crunch for the next four years.

"I believe oil prices during this decade will hold steady," Naimi told a Euromoney conference in Riyadh, but did not give a price range and said price movements are hard to predict.

"As for the kingdom's production, we are willing to increase it if there is a need and the new additions to production will be of light crude," he said. The kingdom has been producing around 9.5 million barrels per day (bpd).

Oil held near $70 on Tuesday with U.S. light crude down 7 cents at $69.70 a barrel and London Brent up 12 cents at $70.33.

Naimi has said that prices above $70 are not in the interest of producers or consumers. U.S. oil prices hit record levels above $75 a barrel last month, partially due to worries over Iran's standoff with the West over its nuclear ambitions.

The Organization of the Petroleum Exporting Countries (OPEC) supplies about a third of the world's oil, but has been unable to rein in prices. It meets next on June 1 and several ministers have reiterated the cartel is powerless to bring down prices.

Naimi said Saudi Arabia's surplus output capacity was 1.8 million bpd and would be built up over the next three years.

"Which means that it (the kingdom) is able to fulfill 50 percent of the expected increase in world oil demand by 2010," he said.

"It is highly probable that the increase in demand for oil at the end of this decade will reach about 6 million bpd...I have no doubt that the oil producing countries, with the kingdom at the forefront, are capable of easily meeting this increase."

Riyadh has embarked on a $50 billion drive to expand production and refining capacity. A trio of new oilfield projects will allow the kingdom to pump 12.5 million by 2009.

REFINING BOTTLENECKS

Consumer governments have urged major producers to inflate the global supply cushion stretched thin by the demand growth in Asia and the United States that sparked a four-year price rally.

OPEC in turn has said concern over shortages of oil products such as gasoline and diesel, due to a lack of global refining capacity, has played a big part in driving oil prices up.

"We believe the concern for the industry in the next four years will be whether there will be adequate global refining capacity..." Naimi said.

The minister called on consuming and producing nations to lift obstacles facing the refining industry, which lost investment over the last two decades due to declining returns and restrictions imposed by industrial countries.

"Despite the fact that there are several global projects to build new refineries or expand some existing refineries ... these projects take a long time to complete," he said, adding that existing refineries were old and needed to be modernized.

Naimi said state-run Saudi Aramco will boost refining capacity at home and abroad by 2 million bpd in the next five years -- including building two new export-oriented domestic refineries with international firms and expanding the capacity of domestic and joint refineries in Riyadh, Yanbu and Jubail.

The minister said the kingdom's Ras Tanura refinery will be upgraded with international participation to become a complex for refining and production of petrochemicals. "We hope to begin this development early next year," Naimi said.

Michael C. Sanfilippo

msanfilippo@greatforest.com