Forecasts revised upward as energy prices keep climbing

by Ron Sterk
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KANSAS CITY — With crude oil futures and retail diesel and gasoline prices climbing to new record highs last week, forecasts for summer and fall energy prices have been tweaked upward.

While some projections called for lower prices in the second half of the year, others predicted crude oil could top $140 a barrel in 2008.

Investment bank Goldman Sachs on May 16 forecast crude oil prices would average $141 a barrel in the second half of 2008 due to continued tight supplies, and would average $148 in 2009.

July crude oil futures traded on the New York Mercantile Exchange shot past $135 a barrel last Wednesday, more than double the nearby continuous price of $66.27 a year ago.

"It seems like the market could be peaking," said Tim Statts, director, risk management at Summit Energy, Louisville, Ky. "But it has broken every level of resistance we have and is very difficult to predict. No model has forecast this price (for crude oil).

"Fundamentally, we have a high level of demand."

Mr. Statts cited continued strong growth in China, although he added that factors beyond demand also were influencing the rise in crude oil futures prices.

Even before the latest crude oil price run-up, the Energy Information Administration of the U.S. Department of Energy boosted the price forecasts in its May 6 Short-Term Energy Outlook.

"West Texas intermediate (W.T.I.) crude oil prices, which averaged $72.32 per barrel in 2007, are projected to average $110 per barrel in 2008, up about $9 per barrel from the projection in last month’s Outlook, and $103 per barrel in 2009, up about $11 per barrel from the previous Outlook," the E.I.A. said. The W.T.I. price last week hit $128.93 a barrel.

"The combination of rising global demand, fairly normal seasonal inventory patterns, slow gains in non-OPEC supply and low levels of available surplus production capacity is providing support for prices," the E.I.A. said.

"I’m not sold on crude oil prices averaging over $100 a barrel in 2009," Mr. Statts said.

Petroleum products, understandably, are following crude oil higher. Retail diesel fuel prices averaged a record $4.497 a gallon across the United States last week, up more than 16c from a week earlier and up $1.694, or 60%, from a year ago. Diesel prices were forecast by the E.I.A. to average $3.94 in 2008, up 37% from the 2007 average of $2.88.

"This reflects global strength in diesel demand that is contributing to a widening of the margin between diesel prices and crude oil costs since last year," the E.I.A. said in its latest Outlook.

Retail gasoline prices also hit record highs last week with the U.S. average for all formulations of regular climbing to $3.791 a gallon, up nearly 7c in a week. The latest E.I.A. forecast for average retail gasoline prices in 2008 was $3.52 a gallon, up from $2.81 last year, based on "a sizable narrowing of refiner gasoline margins from last year, attributable to weakness in gasoline demand and growth in ethanol supply." The E.I.A. forecast prices to average $3.44 a gallon in 2009.

Mr. Statts noted gasoline prices haven’t kept pace with gains in crude oil, indicating there was room for gasoline prices to move higher.

President George W. Bush recently visited Saudi Arabia to request additional oil output to bolster available supply. The Saudis increased output by 300,000 barrels a day but only to offset reductions from other exporters, and indicated there was no reason to increase production currently. They also hinted that an increase was unlikely to come out of the next meeting of the Organization of Petroleum Exporting Countries on Sept. 9.

The D.O.E. on May 16 stopped contracting for the inflow of up to 13 million barrels of crude oil into the U.S. strategic petroleum reserve. The fill rate of 76,000 barrels per day for a royalty-in-kind contract would have begun July 1 with deliveries of crude oil set to begin in August and run through December. The reserve has capacity of 727 million barrels and currently was near 703 million, the D.O.E. said.

The United States used an average of 20.7 million barrels per day of liquid fuels and other petroleum products in 2007, according to the E.I.A.

"Based on projections of weak economic growth and record high crude oil and product prices, consumption is projected to decline by 190,000 barrels per day in 2008," the E.I.A. said. "After accounting for projected increases in ethanol use, U.S. petroleum consumption is projected to fall by 330,000 barrels per day."

At a Senate Judiciary Committee hearing on high oil prices last week oil company executives attributed the record prices in part to tight supplies created by exporting countries "managing demand," and a lack of refining capacity in the United States.

The House also scheduled a committee hearing on the issue of high energy prices late last week.

This article can also be found in the digital edition of Food Business News, May 27, 2008, starting on Page 22. Click here to search that archive.

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