WoodMac: No gas price rebound seen in near term

June 1, 2009
Weakness in global natural gas markets will delay a recovery in US gas prices and rig counts.

Weakness in global natural gas markets will delay a recovery in US gas prices and rig counts. Exacerbating the weakness in gas demand has been a marked downturn in demand for electric power by both industrial and residential customers, analysts with the research and consulting firm Wood Mackenzie told reporters on May 20.

The economic recession has had a big impact on US natural gas, electric power, and coal markets. The contractions in the economy during fourth quarter 2008 and first quarter 2009 led to a contraction in power demand at a time when gas supply was increasing from successful development of shale gas and from an increase in LNG imports.

Speaking on power markets, George Given, WoodMac’s head of global power research, said he expects the global economic recession will last several more quarters.

Industrial electric power loads were down sharply in the first quarter, Given said, and residential demand for power has declined more sharply than expected based on the extent of the contraction in gross domestic product. Given said the current downturn increases the likelihood that electric power plants will be mothballed and retired to balance supply and demand.

Although gas rigs have been laid down drastically since September 2008 in response to a gas supply overload and the resulting crash in prices, an upswing is not in the offing next year, according to Jen Snyder, principal analyst for North America gas and power research at WoodMac.

Snyder said a gas price recovery will not come from a lower rig count, but a recovery in gas prices instead will result from a recovery in gas demand. There will be a modest upswing in GDP in 2010, she said, but gas demand recovery will lag until 2012. In the meantime, Snyder sees little upside potential for gas prices.

The US gas market faces three key challenges in the short-to-midterm, Snyder noted. The first challenging condition is a combination of low demand and plentiful coal capacity in the electric power market.

Also posing a challenge to the US gas market is LNG, as there is currently a wave of global liquefaction capacity and oversupply in Europe and Asia. Time lags between drilling decisions and supply responses are the third key challenge to the gas market, Snyder said.