12/08/2009
The outlook for natural gas for 2010 remains negative as the supply of the fuel outstrips demand. This situation will
remain in place throughout the 2009-2010 heating season, unless the
According to the Energy Information Agency (EIA) the natural gas outlook predicts decline in total natural gas consumption to decline by 1.3 percent in 2009 followed by an increase by 0.6 percent in 2010 (Total U.S. Natural Gas Consumption Growth). Growth due to weather related use in the residential and commercial sectors in 2009 cannot overcome the current economic weakness in the industrial and electric power sectors. Consumption in the industrial and electric power sectors is expected to decline by 5.1 and 1.0 percent, respectively, in 2009. Consumption growth in 2010 remains largely dependent upon the timing and pace of economic recovery. Based on current assumptions, 2.2-percent growth in the electric power sector combined with slight growth in the residential and industrial sectors are all expected to contribute to 2010 consumption growth.
Included in the natural gas outlook, prices could remain low over the next few years as new coal-fired electricity plants open, reducing the overall amount of the natural gas used to generate power. According to Jen Snyder of Wood Mackenzie, when these new plants come online, demand for natural gas could rise sharply as older coal-fired plants are retired and government policies show a greater preference for cleaner energy sources.
In her view, prices could even spike to $10 per million British Thermal Units in the 2013-2014 timeframe, as producers are unable to keep up, before falling back to the $6.50 range after that period.
Winter weather is the leading factor in natural gas demand. Cold winters lead to use of more gas. Warmer winters reduce demand.
For example, the Oceanographic and Atmospheric Administration (NOAA) reported that there were 130 TDDs, or Total Degree Days (2 of which were CDDs, or Cooling Degree Days) during the week ending November 28. This was 19% below normal levels and 29% below last year. This warmer weather caused the use of natural gas to be much lower than in past years.
Colder weather in December will drive up demand. What is important to follow is how long the cold weather will last and whether the temperatures are average, below average or above average.
Using NOAA weather factors and
EIA historical withdrawal rates, Raymond James developed the natural gas outlook
tables below showing expected withdrawal rates. If this forecast turns out to be
right, the
According to the EIA, with so
much gas in storage the outlook for natural gas annual production in 2010 is
expected to decline relative to 2009 in the Federal Gulf of Mexico and Lower-48
For the week ending
The EIA publishes a
weekly report
of the natural gas in storage. Working gas in storage was 3,837 Bcf as of
As shown in the chart from the EIA, Working Gas in Underground Storage Compared with 5-Year Range was well above the range.
Producers, due to voluntary shut-ins, completion delays, and pipeline/gathering constraints, have been reducing supply for several months. Since storage capacity is at an all time high, recent injections have been low. With gas prices around the $5.00 area, we should expect production to pick up as withdrawal rates increase. It is difficult to determine how much production will return, though it will tend to offset the withdrawal rates.
Price decreases leading up to
Thanksgiving reflected the usual decrease in demand that generally occurs during
a holiday week. A decrease in industrial demand and milder-than-normal
temperatures in some areas of the country also drove price down. According to
Bentek Energy, LLC, total
Contributing to the natural gas
outlook, the price disparity between natural gas and oil has widened, leading
some to believe that there is a natural upward pressure on natural gas. Part of
the reason oil is experiencing higher prices is from the growing demand from
emerging economies. While
Shorter term, the following is a possible scenario for natural gas outlook for 2010 and 2011. The large increase in proved reserves has come from shale gas using hydraulic fracturing and horizontal drilling. Natural gas produced from shale can lose as much as 50% of its production rate in one year. To maintain the same level of production natural gas producers must drill more wells than other formations. With the high levels of storage, producers have curtailed their drilling programs. As a result, they will experience lower production within the next year. This means production will taper off in the spring to summer of 2010. If companies do not pick up their drilling in the middle of 2010, available supply will not come online to recharge storage. this could lead to an increase in prices as supply fails to reach prior levels, meaning the earliest natural gas prices can make a comeback is late 2010.
Until then the price of natural gas will remain under pressure as supply exceeds demand. Therefore, investing in the natural gas ETF (UNG) will not prove viable until next summer at the earliest as investors begin to realize that the supply will not reach 2009 levels.
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