Energy prices to drop slightly in 2007
Overall energy rates will remain historically high—86% higher than a decade ago.
By Tom Stundza -- Purchasing, 1/18/2007 7:00:00 AM
Energy use is getting more and more efficient all the time. But demand just keeps growing. Small wonder that 83% of the buyers polled by Purchasingdata.com in early winter expect energy costs to remain pricey in 2007—even if they won’t reach the peaks of last summer. But, according to the market gurus, energy on average will cost buyers about the same—or, maybe, just a little less—in 2007 as it did in 2006.
The key to remember is that energy costs overall are 86% higher than they were a decade ago. Note that the price of North American benchmark West Texas Intermediate (WTI) crude oil at the terminal eased from an average $71 per 42-gallon barrel in the third quarter to $55 in final quarter, bringing the full-year average to $66. The annual average was 21% higher than in 2005, the sixth consecutive year-on-year increase. Last autumn’s announcement of plans for a daily cutback of 1.2 million barrels in crude oil production by the Organization of Petroleum Exporting Countries (OPEC) didn’t have much of an impact on world oil prices—due to a lack of evidence of substantial compliance with the cutback agreement. Also, top oil exporter Saudi Arabia says the OPEC cartel is only striving for a “fair and stable” oil price, which some in the producer group have signaled would be $60/barrel for U.S. crude. A projected increase in world oil consumption growth in 2007 is expected to result in an increase in the demand for OPEC oil from 2006 levels. With the expected reduction in OPEC oil production and with growing petroleum demand during the winter heating season, the average monthly price of WTI crude oil is projected to rise by about $2/barrel each month over the winter months—and then decline as the warmer weather returns.
Interestingly, the crude oil price direction has grown increasingly unclear, with analysts at odds over supply and demand fundamentals. So, there really is no consensus for the 2007 price of WTI crude; in fact, there are wide ranges for 2007 price forecasts, creating an overall consensus of $65/barrel—barely a 1.5% year-on-year decrease.
Oil producers and refiners have been unable to keep pace with rising global demand for crude oil and refined fuels—so prices for downstream products have doubled in the past three years. Diesel fuel averaged more than $2.70/gallon last year, as compared with $1.32 in 2002. No. 2 fuel oil delivered to industrial customers
cost an average in excess of $2/gallon, as compared with 83¢ five years earlier.
Natural gas prices peaked back in 2005 because of the Gulf Coast supply disruptions caused by the late-summer hurricanes. Natural gas prices peaked at more than $14 per million British thermal units in December of 2005, according to EIA records, up from an average of $2 during the 1990s. Industrial customers paid 12% less for delivered natural gas last year (at an average $7.50 per thousand cubic feet) than in 2005. That still was 18% costlier than the rates paid in 2004 but fuel switching over the past two years from more expensive residual fuel oil to cheaper natural gas for electricity generation has bolstered U.S. demand.
UBS Securities is looking for natural gas at the wellhead to average $9/mcf in 2007. That may be a little high, according to other analysts who suggest wellhead prices will average $8 this year. Reason: High levels of natural gas in storage and a forecast of slightly warmer-than-normal weather should keep these spot prices under $9/mcf through the winter heating season—and set the stage for reduced pricing back toward $7 in the spring and summer months.
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