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BP Spill Means Oil Prices Gain as Output Falls: Energy Markets

BP prompts standards for offshore drilling
The Transocean Ltd. Development Driller III platform, leased by BP Plc, works to drill a relief well at the BP Deepwater Horizon oil spill site in the Gulf of Mexico near the coast of Louisiana. Photographer: Derick E. Hingle/Bloomberg

Higher crude prices and rising imports may be in store for the U.S. after the government slashed its forecasts for Gulf of Mexico output by 6.1 percent following the BP Plc spill, the worst in the nation’s history.

The production cut will average 26,000 barrels a day in the fourth quarter and 70,000 barrels a day next year, the Energy Department said yesterday in Washington in its monthly Short-Term Energy Outlook. The reduction, amounting to 0.5 percent of the oil processed in the U.S., follows President Barack Obama’s decision to put a moratorium on deep-water drilling in the Gulf.

The decline would coincide with an economic rebound that will boost fuel demand to the highest level since 2008, when New York oil futures jumped to a record $147.27 a barrel, the report showed. The U.S. economy grew at an annual pace of 3 percent in the first quarter, according to the Commerce Department.

“Unless consumption is reduced, U.S. prices will be higher because we’ll have to bid for oil from other parts of the world,” said Edward Morse, the New York-based head of commodities research at Credit Suisse Group AG, Switzerland’s second-largest bank. The moratorium will have its biggest impact on long-term prices, he said.

Crude traded in London will rise to $80 a barrel in the fourth quarter, up 28 percent from 2009’s average, Morse said.

Benchmark U.S. West Texas Intermediate oil will average $78.75 a barrel this year, 28 percent higher than the 2009 average of $61.66, according to the Energy Department outlook.

Deepwater Halt

The Obama administration ordered the halt in deep-water drilling and extended a ban on new permits after the oil spill caused by an April 20 fire aboard the BP-leased Deepwater Horizon rig in the Gulf.

The Energy Department lowered its 2010 forecast for Gulf production at federal leases to 1.69 million barrels a day from 1.8 million estimated a month ago, the report showed. The overall forecast for domestic production dropped by 2.2 percent to 5.39 million barrels a day.

Global oil consumption will grow 1.8 percent to 85.51 million barrels a day in 2010, the Energy Department forecast. It will increase another 1.9 percent in 2011 to 87.12 million.

“About 75 percent of the production in the Gulf of Mexico comes from waters deeper than 650 feet,” said Andy Lipow, president of Lipow Oil Associates LLC, an energy consulting company in Houston. “Should we curtail that future drilling, we would see an impact on U.S. production. In an environment where total world demand is growing, this impacts supply.”

Gulf Output

Gulf output will average 1.55 million barrels a day next year, down from 1.76 million in the May forecast. Overall U.S. production next year will drop by an estimated 2 percent.

The U.S. imported an average of 9.06 million barrels of crude a day in 2009, according to the Energy Department. The Organization of Petroleum Exporting Countries accounted for about 48 percent of that. Imports last year represented about 63 percent of U.S. crude demand.

OPEC pumped 29.372 million barrels of oil a day in May, according to Bloomberg News estimates. The producer group has the capacity to pump as much as about 35 million.

“There’s going to be no quick return to the days of 2008 because we have so much more OPEC spare capacity,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We got down to 1 million barrels a day of spare capacity then, and now we’re looking at almost five times more than that.”

Crude oil for July delivery on the New York Mercantile Exchange rose for a second day, gaining 1.7 percent to $73.22 a barrel at 8:33 a.m. in New York. Oil is 4.6 percent higher than a year ago.

‘Significant Impact’

“We’ll see a significant impact on 2010, 2011, 2012 and early 2013 production,” said Roger Read, an analyst in Houston at Natixis Bleichroeder, an investment and financial-services company. “The impact will start to be felt in prices 12, 24 and 36 months out.”

Oil for delivery in a year’s time is 8.5 percent higher than the front-month contract on the New York Mercantile Exchange, while futures for three years time are at a 15 percent premium.

Eleven workers were killed in the April blaze, which also sank the $365 million rig. London-based BP, the largest oil and natural-gas producer in federal waters of the Gulf, has spent more than $1 billion in unsuccessful attempts to reduce the flow of oil from the leak and clean up the crude.

The company faces criminal and regulatory probes and has lost 38 percent of its market value since the incident. BP said it collected 7,850 barrels of oil from the leaking well from midnight to noon today.

Drilling for oil and gas in the Gulf of Mexico dropped by 50 percent last week to the lowest level in 16 years, according to a report by Baker Hughes Inc.

“The government is under no obligation to open everything up six months and a day from the start” of the moratorium, Read said. “At this point, it’s difficult to say what they’ll come up with.”

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