EIA forecasts gradual improvement in US gas markets

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Feb. 11 -- US natural gas markets should gradually improve during 2010 with modest demand growth, lower production and imports, and higher prices, the US Energy Information Administration suggested in its latest Short-Term Energy Outlook.

“EIA expects total natural gas consumption to increase 0.4% to 62.5 bcfd in 2010 and another 0.4% in 2011,” EIA said Feb. 10 in its latest monthly outlook. It also forecast that total marketed gas production will decline 2.6% to 58.7 bcfd in 2010 and increase by 1.3% in 2011.

Projected US pipeline imports will fall by 8.3%, or 700 MMcfd, to 8.1 bcfd this year from the sustained impact of lower Canadian drilling and production and from increasing demand from oil sands projects in western Canada, EIA said. “A portion of the decline in pipeline imports this year is expected to be offset by imports of [LNG], which were double year-ago levels in January as temperatures plummeted and prices jumped,” it added.

EIA said very cold weather during January’s first half, particularly in the Southeast, contributed to an 8.4% jump in its monthly estimate of demand to generate electricity from its previous forecast. “The latest estimate for electric power consumption in January would be a new record for the month,” it indicated.

While demand for gas to produce power has been strong so far this year, EIA said an expected increase in coal-fired generation capacity and higher gas prices later in 2010 should reduce gas’s share of the baseload power mix by 1.3% despite lower-than-normal snowpack in the Northwest which could lower hydroelectric generation there by 8% and boost demand for gas.

It said that it anticipates stronger residential, commercial, and industrial demand to more than offset a drop in consumption for power generation, leading to the 0.4% rise in overall domestic gas demand. The strongest growth is expected from industrial customers as a result of improved economic conditions, EIA said.

Production outlook 
According to EIA, the impact of continued lower drilling activity, following the number of working US gas rigs hitting a low of 665 in mid-July 2009, will contribute to the 2.6% production decline it forecast for 2010. “While the number of working gas rigs is currently about 25% below the year-ago level, [it] has increased during the last month by about 100 rigs to a total of 861 at the end of January,” it said.

Current 2010 futures prices of $5.50-6.70/MMbtu “appear to provide the necessary economic incentive to expand drilling programs even further,” it added. “As a result, EIA expects monthly gas production to begin to slowly increase later this year and continue on an upward trend through the end of 2011.”

Total gas in storage was 2,406 bcf on Jan. 29, 150 bcf more than the previous 5-year average and 199 bcf higher than the comparable 1999 week’s level, the forecast noted. “Colder-than-normal temperatures in the first half of January led to the largest consecutive-week withdrawal on record as a total of 511 bcf was pulled from storage,” it said. Withdrawals for the 2 weeks ended Jan. 15 were a combined 317 bcf above the average withdrawal for the corresponding weeks over the previous 5 years, it observed.

Considerably warmer temperatures during January’s final 2 weeks led to withdrawals totaling 201 bcf, compared to the previous 5-year average of 357 bcf for the comparable period, EIA said. It said that it anticipates working gas inventories will finish 2010’s first quarter at about 1,644 bcf, or 7% higher than the 2005-09 average.

The Henry Hub spot price averaged $5.83/MMbtu in January, 49¢ more than December’s average spot price and 36¢ higher than January’s forecast price in last month’s STEO, according to the forecast. The spot gas price peaked at $7.51/MMbtu on Jan. 7 as colder weather tightened its grip on much of the country, then fell to about $5.30/MMbtu by the end of the month as temperatures eased, it said.

EIA said that it expects the Henry Hub spot price to average $5.37/MMbtu in 2010 and $5.86/MMbtu in 2011, with relatively high inventories and increased domestic production keeping prices from rising too dramatically.

Contact Nick Snow at nicks@pennwell.com.

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