Capstone Energy Services


Slowing U.S. Economy

June 27th, 2011

OMAHA (Capstone Energy Services) – Energy prices are little changed this week as weather related demand has been offset by slackening economic growth. July natural gas ended the Wednesday session at $4.317 per MMbtu down $.07 for the day and down $.26 from a week ago, but little changed from the same week during the months of May and April. The price for August NYMEX crude oil finished Wednesday at $95.41 per barrel up $1.24 but only slightly higher than a week ago. Brent crude on the Intercontinental Exchange was up $2.30 at $113.25 per barrel. The price spread between Brent and NYMEX crude prices remains near a record high. Domestic crude is being depressed by increased production, high inventory levels and slackening domestic demand, while Brent crude prices more closely reflect the uncertainty created by increasing emerging market demand and ongoing disturbances in North Africa and the Middle East.

This week the Federal Reserve revised U.S. economic growth projections from 3.1%-3.3% to 2.7%-2.9%. This revision is in line with other economist projections and leading economic indicators that suggest slowing growth. The ongoing effect of high energy and other commodity prices are contributing to the slowdown. The Energy Information Agency in its June 2011 Short Term outlook now expects natural gas consumption to increase by only 1.4% in 2011 and to remain virtually unchanged for 2012. Domestic natural gas production for 2011 is expected to increase by 4.5% in 2011 but will level off in 2012 reflecting the changing domestic drilling emphasis from natural gas to liquids because of the very large price differential.

The slowing economy should serve as an effective price increase limiter on natural gas and reduce concerns about supply sufficiency. Domestic natural gas should continue to be insulated from the external factors affecting crude oil and other commodity markets but will be directly affected by both unusually hot weather and hurricanes. With the rapid increase in domestic onshore production, the potential damaging effect of hurricanes in the production areas of the Gulf of Mexico is decreasing but will still create significant price volatility. Nevertheless, it appears that any concerns of unusual increases in natural gas prices later in the year may be lessening.

Increased domestic supplies and high inventories of crude oil in Cushing OK will keep NYMEX crude prices lower than Brent crude prices, but both will still be subject to price volatility created by international geopolitical events and commodity investment strategies of non-commercial investors. While crude oil prices may have been temporarily lifted by the OPEC stalemate last week, this week’s report by the International Energy Agency warning of the detrimental economic effects of high oil prices will pressure OPEC to reconsider increasing quotas and give Saudi Arabia additional incentives to maintain production in excess of quotas thereby keeping prices down.


By Ed Freeman

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