Energy Sector Update by Joseph Dancy 08/22/2006

ENERGY SECTOR UPDATE
by Joseph Dancy, LSGI Advisors, Inc.
Adjunct Professor, SMU School of Law
August 22, 2006

The following developments in the energy sector last month continue to support a bullish case for the sector:

Last week the Energy Information Administration announced a draw of 7 billion cubic feet (bcf) from natural gas storage facilities.

The average injection for the week is roughly 60 bcf. This is the first withdrawal in July ever, and represents the demands placed on natural gas peaking power plants during the ongoing heat wave.

While natural gas storage is well above normal (see AmericanOilman.com gas storage chart) we think this is positive for the natural gas market, and expect natural gas injections over the next several weeks to be well below average.

Demand for natural gas at current prices has been well above what many expected, in part due to the high temperatures across the nation. We expect this incremental demand will help stabilize natural gas prices in the futures market at or above $6 per mmbtu � which should help stabilize the stock prices of natural gas producers and service providers.

The increases in global crude oil production has slowed (see chart from TheOilDrum.com) while demand continues to increase in both the West as will as in Asia.

China's economy continues to grow at double digit rates according to the data released last month, and their economy is not as energy efficient as many in Europe or North America.

China's statistics bureau said the economy grew at an unexpectedly torrid annual rate of 11.3 per cent in the second quarter of this year � far above the official targets and the predictions of most economists.

Much of the growth in world oil production since 2002 has been from Russia � but according to Raymond James & Associates �Russian oil production posted minimal growth since 2004� and they see little acceleration in Russian production capability over the next few years.

In another recent note Raymond James points out that Mexico produces 4% of the world's oil and has the largest field in the Western Hemisphere � Cantarell, located in the Gulf of Mexico. Production trends in Mexico indicate that �it is too early to tell whether Mexican production has already set an all-time peak, but based on the last three years of data, it seems that the peak is fast approaching, if not already here.�

Global crude oil demand will rise more quickly in the next five years as high prices fail to derail growth in China and India, the International Energy Agency said in a report last month. Global demand will rise on average by 1.8 million barrels per day, or 2 percent, a year to reach 93.7 million bpd in 2011. Average annual demand grew by 1.8 percent in the past decade. Lawrence Eagles, head of the IEA's Oil Industry and Markets division, noted "there are a number of large developing countries such as China that have reached a threshold level of income in which oil demand starts to take off."

Output at Mexico's most important oil field has fallen steeply this year according to a report last month, raising fears that wells that generate 60 percent of the country's petroleum are in the throes of a major decline. Production at the Cantarell field, the world's second-largest oil complex, averaged just over 1.8 million barrels a day in May. That's a 7 percent drop from the first of the year and the lowest monthly output since July 2005, when Hurricane Emily forced the evacuation of thousands of oil

workers from the region.

Crude oil production in Nigeria has been slashed by a total of 675 000 barrels per day, or 26 percent of the country's normal daily output, according to a recent report. The cut was a result of recent militant attacks in the Niger Delta and a pipeline leak. Nigeria produces light sweet crude, ideal for refining.

A crude oil distillation unit of the Amuay refinery, located in Paraguan� Refining Compound in Venezuela, caught fire last month. The unit that burned processes 190,000 barrels of oil per day. It was initially announced that the unit would be shut down for five to seven months. Subsequent reports indicated the facility will be operational within a month or two. The U.S. is a major importer of Venezuelan refined products.

U.S. electricity demand hit an all-time record the week ending July 23^rd as U.S. utilities delivered 96,314 gigawatt hours of electricity. The previous record was 95,259 gigawatt hours set the week ending July 23, 2005.

The U.S. Baker Hughes drilling rig count at month end stood at 1,714 versus 1,412 at a year ago (see chart at right, source: WTRG Economics),and demand for drilling rigs and related equipment remains robust.

Crude oil futures prices last week were roughly $74 per barrel versus $60 in the year earlier period. Natural gas futures prices have been volatile, but are at roughly $7.20 per million BTU's last week versus $7.90 in the year earlier period.

Contact Information

Joseph Dancy, Adjunct Professor, Oil & Gas Law, SMU School of Law, Advisor, LSGI Market Letter | Joseph Dancy's Book Reviews | E-mail