By Chris Nelder
Posting in Energy
Energy analyst Chris Nelder looks into his crystal ball to see what 2013 holds for oil and natural gas prices.
It's the end of the year, which means it's time to peer once again into my crystal ball and see what the future holds. It's also the time when I like to look back at my previous forecasts and see how they held up. So without further ado, here are my forecasts for oil and gas prices in 2013.
I can't recall a time when analysts' oil price forecasts for the coming year were so divergent. At the high end, Goldman Sachs and Morgan Stanley think the global oil benchmark Brent will average $110 next year, while a few other analysts think it will average more than $115. At the low end, Raymond James analyst Praveen Narra sees Brent averaging just $80. Deutsche Bank says the spread between analysts is even wider, with a $50 gap between the high and low forecasts.
None of these analysts have particularly stellar track records though. Goldman recommended in February that their clients go long on U.S. oil at $107.55, very nearly the peak price of the year (it was only exceeded four other days this year, in February and March) and an excellent time to sell. In October 2011, Raymond James forecast an $85 average for the U.S. benchmark WTI in 2012; it currently averages $94.35 for the year.
Analysts at the low end seem to be particularly carried away. Francisco Blanch of Bank of America Merrill Lynch told Bloomberg that WTI is their "big short" for next year, and speculated that WTI could drop as low as $50 a barrel within the next two years. Citigroup's Ed Morse asserts that U.S. producers can break even down to $72 a barrel, and would keep drilling new tight oil wells at $60 because they're hedged.
I'm inclined to short those shorts. Some U.S. producers may be hedged under $70, but not 100 percent of U.S. production, and various sources say that at $70, U.S. tight oil production would become unprofitable and cease. Yes, overly bearish sentiment can drive prices below marginal production costs for awhile, as they have done in the past, but even if that were to happen in 2013 (which I doubt), I don't think it would last for more than 3 to 6 months. Indeed we should hope that producers aren't using hedges as a way to extend production long past the point of profitability, as shale gas producers have done for the past two years, because it would ultimately starve investment in future production and kill the tight oil growth trajectory.
My outlook for oil prices is essentially unchanged from my June forecast: Oil producers will cling to the "narrow ledge" for another year. As I predicted at that time, oil prices did in fact move back up in the second half of the year; OPEC kept output unchanged; Israel did not bomb Iran; and spare capacity increased. On the basis of that model, I would probably choose a $110 average for Brent in 2013, but I'm inclined to reduce that forecast slightly for the following reasons.
First, I expect WTI to continue to remain at a $10-15 discount to Brent, down from $17 this year, due to the ongoing glut at the Cushing, Oklahoma hub. By comparison, Goldman Sachs thinks the Brent-WTI spread could fall to as little as $4.50. Enbridge says that its Seaway pipeline will ramp up from 150,000 barrels per day this year to 400,000 barrels per day in January, carrying more oil from Cushing to Houston and helping to relieve the backup over the course of the year. However, if the latest outlook from the U.S. Energy Information Adminstration (EIA) is in the right ballpark and U.S. tight oil production increases by 300,000 barrels per day in 2013, it will largely offset the increased offtake capacity. A sustained wide discount of WTI to Brent should drag the latter down slightly.
Second, global demand growth is modest, and supply should be more than adequate. The EIA expects global consumption to rise by nearly 1 mb/d (million barrels per day) in 2013, while OPEC production rises 0.65 mb/d and non-OPEC production rises by 1.3 mb/d, with essentially all of the latter increase coming from U.S. tight oil and Canadian tar sands. I might quibble with those numbers, but I am comfortable with the notion that supply will be sufficient to keep prices moderate.
Third, global spare production capacity is well above the price-spike-inducing danger zone of roughly 1 percent, and should remain comfortable. It's currently around 2 mb/d, according to EIA, and could grow to 3.3 mb/d by the second quarter of 2013, more than 3.5 percent of demand.
My call is that Brent will average around $105 in 2013, and WTI will average around $90 - $95.
For the record, I once again won the bet this year with some oil-literate friends by predicting at the start of the year that Brent would average $105 in 2012; the actual average as of this writing (a week before press time) is $111.72. Curiously, that's just $0.60 lower than where Brent traded on the first trading day of 2012.
U.S. gas supply appears to be going nowhere. As I detailed in October, the EIA expects total US gas production to remain basically flat throughout 2013 at around 69 billion cubic feet per day.
At the same time, demand continues to increase. Low natural gas prices continue to push coal out of the power generation business, a trend I highlighted one year ago. The latest casualty is Edison Mission Energy, which operates coal-fired power plants in Illinois and three other states. The company filed for bankruptcy protection on December 17, citing the difficulty of competing with natural gas-fired power plants as a major factor.
Demand for natural gas as a trucking fuel is also picking up, albeit from a fairly low level. Clean Energy Fuels, a leading builder of natural gas refueling stations co-founded by T. Boone Pickens, says it's on track to complete the first stage of "America's Natural Gas Highway" with 70 LNG (liquefied natural gas) truck refueling stations completed this year, and another 70 to 80 stations slated for construction in 2013. As I calculated last January, Pickens' estimate that converting transport trucks to natural gas could cut 2 mb/d from our oil demand might translate into roughly 1.5 trillion cubic feet (tcf) of gas consumption annually, or about a 6 percent increase in total U.S. gas demand.
EIA expects total U.S. gas consumption to rise to 25.4 tcf in 2012, a 4.8 percent increase over 2011 levels, but then to decline slightly in 2013. Gas-fired power generation was exceptionally high in 2012 due to air conditioning demand during an unusually hot summer and EIA apparently expects more normal summer temperatures next year; on that point I'm skeptical.
Natural gas prices still haven't climbed back to the minimum $4 threshold of profitability, with the January 2013 contract at $3.36 per mcf as of this writing. My forecast is for gas prices to approach $4 by the end of 2013, simply because unprofitable endeavors don't go on forever and after two years this one feels about played out. EIA expects gas prices to average $3.68 in 2013, which (amazing!) is precisely the average of today's price and $4.
Unfortunately for climate hawks who have been encouraged to see U.S. carbon emissions fall as power generation switched from coal to gas in recent years, at $4 gas some of that switching will be reversed. I was not able to quantify how much gas-fired capacity could switch back to coal, but reviewing the EIA's list of all US power plants showed that about 11 percent of them can use both natural gas and coal.
As for my predictive accuracy on gas in 2012, I pretty much nailed both the end of the production growth trajectory and the bottom in gas prices.
The Goldilocks zone
The most difficult part of price forecasting is unpredictable events like hurricanes and geopolitical upsets. But unlike this time last year, when I was shaking my head in amazement at the extraordinary events of 2011, I actually feel fairly sanguine about 2013.
2012 proved to be a remarkably stable year, with many of the uncertainties I contemplated failing to materialize and/or exert much influence on oil prices. I did anticipate another major natural disaster, so Hurricane Sandy wasn't really a surprise. Likewise for the still-unfolding effects of the Arab Spring.
Perhaps I was reflecting recency bias then, and perhaps I'm making the same error now, but at the moment I don't see any major geopolitical events influencing oil prices next year. From where I sit today, 2013 looks manageable. Oil prices should stay in the Goldilocks zone -- neither high enough to kill demand nor low enough to kill supply -- and gas prices should slowly rise back up to the point where future shale gas production seems less imperiled than it has this year.
With that, I wish you all a happy and comfortable Christmahanakwanzika, and a prosperous new year.
Photo: Coin-operated fortune teller kiosk (lemonhalf/Flickr)
Dec 25, 2012
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The world is rapidly running out of clean air. Lung cancer rates are skyrocketing. The US needs a feed-in tariff policy to requires Utilities to pay $0.54 kwh for homeowners who harvest solar and feed it onto the grid. Germany did this in 1985, and so is now going to achieve 100% solar power by 2030. California could be at 100% solar & renewables by 2030, if we had 5 people in each city petitioning for a Feed-in tariff during 2013. Can we do this? Youtube: paul8kangas
PEAK is still coming, Don't be deceived. I smile when someone reminds me, and then Kunstler rings loud in my ears reminding me that some people still believe in an inexhaustable, "creamy, noughat filled center". :O) The price-demand destruction cycle(s) we've seen to-date shows another thing... the decline in the remaining net exporters. Decline'll be like Stalin's communism, subtle and ever progressive. When China acquires a hundred million cars or so- like we have in the US, ... you'll KNOW. "A Shortage anywhere is a Shortage everywhere" will apply with full force and meaning.
Oil prices are 10% speculation and the other 90% is due to supply and demand issues. With fracing, supply will likely be adequate ( in combination with imported oil) to meet our needs. However, if the IDC write-off disappears and fracing runs into any environmental barriers, we will probably have to rely even more on imported oil. All of the exotic and high tech drilling techniques are more expensive, so it is likely that with lower oil prices, there would be lower domestic production (since much of the US production in the shale plays and old areas like west Texas), as well. Additionally,if world demand drops because of the austerity measures in Europe,etc, then likely prices will go down and we will have to rely more on oil produced (at least in part) in politically unstable areas overseas.
The EPA has pretty much shut down any new coal plants with new regulations on carbon emissions that coal can't meet. I don't know what the regulations are if a coal plant has been mothballed and then restarted, but the costs of keeping a coal plant mothballed but in a operational state will mean that most of them will be decommissioned if a natural gas plant has been built to take over for them. Here in Colorado, for example, the state passed a law a couple of years ago "forcing" the power utility Xcel to shut down it's oldest coal plants and replace them with natural gas. This bill had the full support of Xcel, which saw it as a way to get state support for charging ratepayers the capital costs of shutting down old inefficient coal plants and replacing them with bright shiny new natural gas ones. In the long run this should result in cheaper energy costs, but to get there ratepayers have to foot the costs of building new plants.
"T. Boone Pickens, says itâs on track to complete the first stage of âAmericaâs Natural Gas Highwayâ with 70 LNG (liquefied natural gas) truck refueling stations completed this year, and another 70 to 80 stations slated for construction in 2013." Is it LNG or Compressed Natural Gas (CNG)
So another year without the development of a "long emergency". Another year with cheap energy for the largest economy in the world. Another year of "business as usual". Another year where my world fails to "get a whole lot smaller". Another year of renewable energy watching their thunder stolen by cheap shale gas. Great! A $4 ceiling for natural gas in the US? Woo-hoo! That's some cheap gas. Sorry about your underperforming investments in solar and wind.
A simple mandate for solar roofs on all new construction and any re-roofing from now on would be all it would take.
Hasn't James Kunstler predicted 10 of the last 3 recessions?! It's not a noughet filled center - it's an energetic shale crust. The US is producing more fossil fuel energy than ever before. We are going to set new records for total fossil fuel extraction for each of the next 10 years. You can try to pretend this massive surge in production is somehow consistent with the Kusntler/Nelder/Hubbert peak, but you just make yourself look sillier and sillier. Why do you think commentators like Nelder have been relegated to the margins, with the tin-foil-hat crowd? Because the last 3-4 years have proved them to be spectacularly wrong.
...what was exchanged using Lisa Jackson's secret e-mail account, in blatant violation of sunshine & retention laws.
The normal fleet truck engine can combust both terms. When a gas changes phase to a liquid it is compressed, No ? Basic chemistry 101. Ice to water to steam. A gas can also go into a solid form as it approaches toward absolute zero. My guess,... too high a EROEI's for solid form, ...and storage + transport would require too much energy till it's used. Liquids... No problemma.
...and then people will really get to experience the neo-Keynesian cheap money policy of the last decade.
Trucks can be adapted to use both CNG and LNG. However, it will probably be stored as LNG at truck stops, and there will a fleet of LNG tanker trucks to deliver LNG to the truck stops. It's not unlike how other liquified gases are transported and stored.
You suck McGrew and that fact is obvious to everyone but you (hence the reason you use multiple accounts like Hates Idiots and you respond to yourself. You are the only one who votes yourself up and that is only due to your multiple accounts). You are a sad and pathetic loser.
"Must be quite frustrating for the defenders of the faith to read such things and have no defense that could be said out loud." I expect that's what Chris Nelder's life is like, every single day. A sad, sad, time to be a peak-oiler.
...with no rebuttal. Must be quite frustrating for the defenders of the faith to read such things and have no defense that could be said out loud.
...if you rely on most of the alphabets for news: https://www.google.com/search?q=lisa+jackson+email&aq=f&oq=lisa+jack&aqs=chrome.0.59j0j57j5j61j60.2381&sugexp=chrome,mod=8&sourceid=chrome&ie=UTF-8#q=lisa+jackson+email&hl=en&tbo=d&source=lnms&tbm=nws&sa=X&ei=muneUP6YHIrm8QTHmYDAAg&ved=0CA0Q_AUoAA&bav=on.2,or.r_gc.r_pw.r_cp.r_qf.&bvm=bv.1355534169,d.eWU&fp=e033c83ce45db25e&bpcl=40096503&biw=1070&bih=862