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Experts Watch for Price Impacts from Demand Destruction

With the continuing climb of crude oil futures following the death of Saudi Arabia's King Fahd, two industry executives took opposing views on the impact of potential demand destruction on crude oil and natural gas prices Tuesday at the Colorado Oil and Gas Association's 17th Annual Rocky Mountain Natural Gas Strategy Conference and Investment Forum in Denver.

Thomas A. Petrie, chairman and CEO of Petrie Parkman and Co., said he sees nothing on the horizon preventing crude from rising even further, while Questar Corp. CEO Keith Rattie said there are early signs that demand destruction eventually will force crude prices lower and presumably natural gas prices as well.

"I believe the current price gains will be with us for quite a while longer," Petrie told the Denver audience. "I doubt the market will turn south" through the rest of 2005 and 2006. Petrie's most likely hypothesis puts oil at an average $50-plus/bbl for the next several years, and natural gas at an average of $6/MMBtu (Henry Hub). But he noted that gas prices could easily "visit $9 or $10."

Petrie allowed that there could be a general downward move as demand adjusts in the face of higher prices. However, he said it would take a major shock, spiking prices to a much higher level to make a major impact on demand. He said he couldn't imagine what the shock would be. However, he described the situation in Saudi Arabia following the death of the king as "the calm before the storm."

Analysts are closely watching the succession in Saudi Arabia, noting that the new monarch is butting heads with the next in line, the crown prince. There appear to be major disputes there, Petrie said.

Meanwhile, Petrie said undeveloped countries are likely to be more price-sensitive than developed countries. But he does not see China cutting back substantially until it hosts the 2008 Olympics. However, one expert in the audience suggested that there already are signs of cutbacks in China.

Rattie said he was seeing a demand response starting to happen already. He pointed to plunging sales of sport utility vehicles at Ford and General Motors. "This kind of behavior could bring markets back to a price level that is more comfortable."

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