Energy’s slow burn

by Ron Sterk
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KANSAS CITY — Energy savings, especially for transportation, hoped for by food processors this year appear to be slipping away as the economy shows signs of recovery and diesel fuel prices advance to nine-month highs. But seven-year lows in natural gas prices have provided some offset, and crude oil prices have stabilized.

The typically volatile crude oil market may see some stability if projections by the Energy Information Administration of the U.S. Department of Energy hold that crude oil prices will average near current levels through 2010.

West Texas intermediate (W.T.I.) crude oil prices were forecast to average $70 a barrel in the fourth quarter, the E.I.A. said in its August Short-Term Energy Outlook. Although that average was up $27, or 63%, from the first quarter of 2009, the W.T.I. price is expected to average $58 a barrel for the full year, down39% from the 2008 average of $98.68.

"The W.T.I. spot price is projected to rise slowly as economic conditions improve, to an average of about $72 per barrel in 2010," the E.I.A. said.

Brad Samples, commodity analyst with Summit Energy Services, Louisville, Ky., said the E.I.A. forecast is "very conservative and a little low." He predicted crude oil prices would average between $80@85 a barrel in 2010, "but not above $100." A "rather tepid" global economic recovery, rather than an upward surge, will keep prices in check, he said.

"We’re not looking for an upside of striking magnitude, but we are looking at an upside," Mr. Samples said. "One thing to keep in mind is that the demand side is very different from last year, but the supply side is similar."

Mr. Samples pointed out that crude oil demand dropped as the global economy deteriorated, but production was slower to react, resulting in a build up in supply and lower prices. But production also will not increase as fast as demand increases as the economy recovers, resulting in a draw down in supply and higher prices.

But the potential also exists for lower crude oil prices in the next two to three months, Mr. Samples said, because of the "very, very high stock level."

He expects crude oil demand to stabilize in the developed countries in 2010, again leaving growth in China as the key to price movement, as it was before the economic slowdown.

There already are "signs of stabilization in demand," Mr. Samples said, noting that demand is down from a year ago, but there has been month-over-month growth.

Based on rising crude oil prices and stronger demand, Mr. Samples expects retail diesel prices to average about $3 a gallon in 2010, which also is above the E.I.A. forecast of $2.84.

The national average on-highway diesel price of $2.67 a gallon the week of Aug. 24 was the highest since $2.81 in mid-November 2008 when prices still were declining from a record high of $4.76 in mid-July of last year, according to the E.I.A. The average has risen for five consecutive weeks and was up 65c, or 32%, from the recent low of $2.02 set the week of March 16.

Still, diesel prices last week were $1.06, or 28%, below the same week last year. And for the entire year the E.I.A. predicted retail diesel prices will average $2.46 a gallon, down $1.34, or 35%, from the 2008 average of $3.80.

Mr. Samples said he saw signs in line with economic data that demand was improving, but the momentum needed to push diesel fuel prices significantly higher still was lacking.

Distillate crack spreads (the cost of a barrel of diesel minus the cost of crude oil that is roughly equivalent to a refiner’s margin) currently are the lowest in a decade because of weak demand and peaking inventories, he said.

The "unsustainably low" crack spreads, or margins, give refiners little incentive to ramp up diesel production, setting the stage for a draw down in inventories and higher prices once demand increases, similar to the scenario in crude oil, Mr. Samples said.

The economic downturn has had a similar effect on natural gas as on crude and diesel fuel supply and demand. Total average daily natural gas consumption in 2009 is expected to be 2.6% below that of 2008, the E.I.A. said.

Industrial demand for natural gas was down about 15% from a year ago, said Lisa Zembrodt, also a commodity analyst with Summit Energy. But unlike crude oil where high stocks have begun to decline, natural gas stocks still were building.

"Natural gas stocks are close to capacity and are at all-time records in different regions," Ms. Zembrodt said, "Prices are the lowest in seven years."

The E.I.A. expects the monthly average Henry Hub natural gas spot price to stay below $4 per thousand cubic feet (Mcf) until late 2009 as natural gas inventories set a new record high. But as the economy recovers and demand builds, natural gas prices are forecast to average $5.48 per Mcf in 2010, up 40% from 2009.

Ms. Zembrodt noted the unusually wide spread between the front month natural gas futures and deferred months, indicating expectations of increased demand as the economy improved.

"We see a little increase in natural gas demand; it’s climbing back," Ms. Zembrodt said. "It all depends on the shape of the economic recovery, how fast it is and if the initial recovery is sustained."

This article can also be found in the digital edition of Food Business News, September 1, 2009, starting on Page 1.

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