Low Energy Prices Raise Concerns —
Although crude oil prices at the end of January had bounced back into the $40s after dipping to the mid-$30s earlier in the month, they remain roughly $100 per barrel below their summer peak. There is growing concern that the lower oil prices will make many projects — especially unconventional ones — economically unviable.
Natural gas prices have experienced a comparable decline, falling from more than $13 per million British thermal units at the end of June to the vicinity of $4.50 at the end of January. At present, the amount of gas in storage is a bit above the five-year average. The lag between drilling activity and when gas actually reaches the market is typically three months to four months, so the high domestic rig counts this fall suggest increased gas production through Q1/09. Rising production and high inventory levels could continue to put downward pressure on natural gas prices.
The Energy Information Administration’s January Short-Term Energy Outlook sees quarterly averages for West Texas Intermediate crude oil no higher than $45 through ’09 before rising gradually to $60 in Q4/10 as real GDP growth shifts from a 2 percent decline this year to a 2 percent increase next year. EIA is somewhat more optimistic about natural gas, which it sees improving from the low $5s in Q2/09 — low enough to preclude many projects — to nearly $7 in Q4/10.
The sustained weakness in energy prices and the plummeting rig count — off by more than 500 from its summer peak of 2,031 — poses significant challenges for the oil and gas industry. Many companies have already cut their exploration budgets and are beginning to rethink their staffing levels.
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