by Calculated Risk on 8/08/2006 02:38:00 PM

The EIA reports: Estimates for Oil prices increased $3.00 per barrel

We have raised our forecast for the August 2006 West Texas Intermediate (WTI) crude oil price to $76.50 per barrel, an increase of $3.00 per barrel from our forecast last month. The higher forecast WTI price is a result of the additional pressures we saw in July and a projected reduction in Alaskan oil production following the August 6 announcement by BP oil company that it was temporarily shutting down Alaska’s Prudhoe Bay oil field, which produces about 400 thousand barrels per day (bbl/d) of supplies (about 8 percent of U.S. domestic crude production), after corrosion and a leak were found in a transit pipeline. Petroleum product prices are also expected to be higher in August, particularly on the West Coast where substitute oil supplies will likely require higher transportation and processing costs.

The EIA's projections have been consistently too low for the last few years.

Click on graph for larger image.

As an example, last October (after the hurricanes) the EIA projected WTI prices to flatten out at $64 per barrel for 2006.


The current forecast show prices peaking at around $76.50 per barrel and declining in 2007.

First, I think the impact on prices from the Alaskan shutdown might be greater than currently expected.

But I also think the slowing economy might lead to lower oil prices later this year and in '07 (like the EIA projections).

Here are the EIA comments on Alaska Prudhoe Bay Crude Oil Production Shutdown

On August 6, 2006, BP oil company announced the shutdown of about 400 thousand bbl/d of crude oil production from the Alaskan Prudhoe Bay field because of corrosion discovered in the pipelines that gather crude oil from the producing wells for delivery to the Trans-Alaskan pipeline. While complete estimates of the volume and duration of reduced crude oil production are not yet available and will not likely be for several days, this Outlook assumes that Alaskan crude oil production is reduced by 300 thousand bbl/d from the original expected level in August, 400 thousand bbl/d in September and October, 300 thousand bbl/d in November, 200 thousand bbl/d in December, and 100 thousand bbl/d in January, then returning to full production. This production outage forecast is based on BP’s initial estimate that the shutdown would last “several” months. Our forecast could change as new information becomes available.

The greatest impact of the lowered Alaskan crude oil production is on the West Coast, which consumes almost all of the Alaskan oil production. West Coast refineries process about 2.7 million bbl/d of crude oil and Alaska was expected to supply about 800 thousand bbl/d to these refineries. The reduction in Alaska crude oil supply from the shut-in of Prudhoe Bay production can be made up for in several ways: drawdown of crude oil or product stocks and substitution of other supplies for the Alaskan crude oil.

Some of the lost Alaskan oil production will be made up from inventories. Crude oil stocks on the West Coast at the end of July were almost 5.5 million barrels higher than July last year and U.S. crude oil stocks were over 15 million barrels higher. Similarly, gasoline and distillate fuel product inventories are above last year’s levels for the U.S. (5.7 and 5.3 million barrels, respectively) and on the West Coast (1.4 and 1.9 million barrels, respectively). The Strategic Petroleum Reserve (SPR), which currently holds about 688 million barrels of crude oil, may also serve as a source of crude oil supply from inventory.

EIA currently estimates that 1.1 to 1.3 million bbl/d of crude oil spare production capacity is available, mostly in Saudi Arabia. Since West Coast (PADD 5) refinery configurations are complex enough to handle various crude qualities, substitutes for Alaskan crude oil are available. Incremental production from Saudi Arabia as well as diverted shipments of crude oil from Ecuador, Colombia, and Mexico can offset all or part of the shortfall.