UCLA Anderson Forecast Depends on $50 Gas

[powayseller]

The funniest part of the UCLA Anderson Forecast is the assumptions they made. Among them is a maximum 5% Federal Funds rate, and $50/barrel gas.

The reason they cite that gas will go back down to $50/barrel? Because natural gas did. They figure if natural gas prices can decline, so can petroleum.

What?

I read up on the reason that NG fell, to determine if this could happen to oil as well.

Natural gas prices rose as speculators raised the futures prices on short supply and worries about a cold winter. The winter was warm, the supplies were not tapped and increased, and now there is a large reservoir of natural gas stored underground. This resulted in natural gas prices falling.

So I am scratching my head. The only way that this logic could apply to oil is that we cut back drastically on our consumption of oil until the supply exceeds demand. Hmmm…

We’re left with gas prices higher than the Forecast predicted. I read media reports that executives are worried that high gas prices are reducing their profit margins and causing consumer to tighten their pocketbooks.

I wonder how the Forecast would differ based on the actual scenario of $70/barrel gas. Ever heard the word recession?

[mycroft]

Just off the top of my head, isn’t most of the natural gas America uses produced in America? If we’re not dependent on foreign sources, then the price of natural gas shouldn’t fluctuate (mostly fluctuate upwards these days) like crude oil does on essentially political events, such as US rattles nuclear sabers followed by Iran rattling oil supply sabers.

Also, again off the top of my head, it seems that the usage of natural gas should be more or less constant. There will be a set number of homes each using about the same amount natural gas that they did the month and year before. The number of homes probably rises each month as new homes are built, however, the amount of natural gas each uses will be fairly predictable. Whereas, the usage of gasoline is primarily in cars, with each driver making daily decisons on how much to drive, and whether to park the Hummer and buy a hybrid based on the costs per gallon.

[4plexowner]

Most NG used in the US is produced in the US. Some NG is imported from Canada.

Right now, NG is almost exclusively transported by pipeline.

Technology for shipping liquid-NG (LNG) via tanker is improving. Cheniere (stock symbol LNG) is building 4 LNG ports in the US – this company will be the dominant LNG supplier in the US. As energy prices remain high, LNG will play an increasing role in the US.

Demand for NG depends to some extent on weather.

Most heating in the US is via NG so cold weather increases NG demand.

Hot weather also increases NG usage because many of the peak-load power plants are powered by NG. As the temperature rises and people turn on their A/C, these peak-load plants fire up.

Interesting tidbit: the oil sands producers are using natural gas to heat up and process the oil sands – this is a new demand for NG and obviously affects the supply / demand equation – less NG may be coming to the US from Canada in the future.

My opinion: we have seen the end of cheap energy – economic forecasts based on $50 oil are not realistic – the awareness of the end of cheap energy has yet to permeate the planet’s awareness

[4plexowner]

Most NG used in the US is produced in the US. Some NG is imported from Canada.

Right now, NG is almost exclusively transported by pipeline.

Technology for shipping liquid-NG (LNG) via tanker is improving. Cheniere (stock symbol LNG) is building 4 LNG ports in the US – this company will be the dominant LNG supplier in the US. As energy prices remain high, LNG will play an increasing role in the US.

Demand for NG depends to some extent on weather.

Most heating in the US is via NG so cold weather increases NG demand.

Hot weather also increases NG usage because many of the peak-load power plants are powered by NG. As the temperature rises and people turn on their A/C, these peak-load plants fire up.

Interesting tidbit: the oil sands producers are using natural gas to heat up and process the oil sands – this is a new demand for NG and obviously affects the supply / demand equation – less NG may be coming to the US from Canada in the future.

My opinion: we have seen the end of cheap energy – economic forecasts based on $50 oil are not realistic – the awareness of the end of cheap energy has yet to permeate the planet’s awareness

[Anonymous]

4plex owner pretty much nailed it.  I am in Energy.

 A substantial portion of the West Coast NG is imported from Canada, Colorado and even Louisiana.

Storage is at all-time highs and NG should come down, if we don't have a tropical storm problem in the gulf, a cool Summer and a Warm Winter.  How long those conditions will last is anyones guess.

There are no LNG plants on the US West Coast and a couple being built in Baja.  Many pundits state that no LNG will ever be built on the West Coast of US.

Some bubble bloggers feel the USD is the reserve currency of the world.  They are incorrect, oil is the world's currency.

 Our food, transportation, business, entertainment and pretty much anything else you can imagine are dependent on oil.

 

$50/barrel oil is a pipedream kinda of like being welcomed into Iraq.

 Don't believe fairytales, whether that is perpetual RE appreciation, cheap oil/energy, or colonialism.

[powayseller]

sunsetbeachguy2 and 4plexowner, how do you think these guys could make an economic forecast based on $50 oil, when at the time of their writing oil was near $70? How reasonable is it for economists to be so off track to think that oil prices can emulate LNG prices? And how does this error in their oil price assumption change the forecast for a recession?

[4plexowner]

Who knows why the $50 oil assumption was made. Maybe they actually believe it. Maybe they think it will be higher but wanted to be conservative (and keep their jobs).

The Energy Information agency is using $40 oil in their “Annual Energy Outlook 2006 – Overview” published in February (http://www.eia.doe.gov/oiaf/aeo/pdf/overview.pdf).
“… world crude oil prices, which are now expressed in terms of the average price of imported low-sulfur crude oil to U.S. refiners, are projected to increase from $40.49 per barrel (2004 dollars) in 2004 to $54.08 per barrel in 2025 (about $21 per barrel higher than the projected 2025 price in AEO2005) and to $56.97 per barrel in 2030.”

Since the UCLA guys are basing their $50 oil assumption on the fact that NG dropped in price, let’s compare the oil market ($wtic) and NG ($natgas) (both symbols are for http://www.stockcharts.com which is a good free charting site). I’m looking at the weekly timeframe so I can see what happened in 2005.

Check out the parabolic spike that NG ($natgas) had in July – October. That is a classic example of a parabolic blowoff and the aftermath.

The oil chart ($wtic) is very tame by comparison. Just a steady climb higher with periodic pauses to rebalance sentiment.

So, from a strictly technical analysis of the charts, it is not reasonable to expect oil to behave the same way that NG did.

And since we are talking about parabolic spikes and their aftermath, I suggest that everyone look at the chart in Rich’s article today (link at top-right of this page). Looks like a parabolic spike to me! Can you say, “OUCH!” How about, “revert to the mean?”

Forecasting a recession is a toughie. It’s easy to be a bear but the timing is difficult. I think the willingness of the American consumer to continue living on debt is the biggest variable in any forecast today. When the American consumer chooses or is forced to stop living on credit our economy is going to be hurt. I’ve been expecting this to happen since 2002 when I started selling my property. It amazes me that the game has continued this long. Will $70 oil cause the consumer to wake up? Who knows.

[Jim Brubaker]

If you look at history, the last time that oil jumped like this, demand dropped and caused a world recession.

It costs $50 dollars to fill your tank. Any one going out for a Sunday drive?

Oil is at $70 per barrel today, ask yourself the question, “Did they raise the price of oil or did they devalue the dollar?”

If they devalued the dollar then I would agree that the price of oil will stay at $70/per barrel.

If thats not the case, I see a recession where no one wants to buy gas on the level they bought before.

Rememer when you use to put only $5 in the tank because you were short of funds, well you ain’t going far on 5 bucks today!

[highpacific]

I could see Oil going down to $50. I think there is already a speculative premium in the oil market. How big? I don’t have a guess. The current high price is causing more and more investment into locating, and extracting more and more oil. ( there is still a ton out there ) At the same time it is causing more people and industries to look for ways to conserve and be more efficient. The laws of supply and demand in my mind dictate that the pendulum will swing back.
Just my opinion of course. I own a lot of oil stocks and watch closely. I think it will eventually be over priced and correct.

[rankandfile]

I agree with the above posts about natural gas coming from the West Coast. I was pulled over in my Ford Taurus the other day for illegally driving in the car pool lane coming back from lunch. I told the occifer that I had some pretzels and beans with my meal and that I really did have natural gas in my car. He didn’t fall for it.

[Author]

Posts