Both Energy and Environmental Analysis (EEA) and Energy Ventures Analysis (EVA), two Arlington, VA-based energy industry consulting firms, predict that natural gas prices will be pressured lower this year -- EEA says possibly as low as $4/MMBtu by the end of the gas storage injection season.
Both firms see a moderate increase in supply, including greater domestic production and higher liquefied natural gas (LNG) and Canadian imports. However, demand also will be on the rise, and, as is always the case in the gas market, a lot depends on the weather.
"Gas prices have a potential to drop significantly (to near $4/MMBtu) at the end of the upcoming storage injection season due to relatively high working gas levels," EEA said in its Monthly Gas Update. "The emergence of any gas price drop this fall will likely be short lived and highly dependent on summer and fall weather conditions (i.e., gas consumption in the power sector this summer, Gulf of Mexico hurricanes and fall temperatures)."
EEA expects that given normal weather prices at the Henry Hub will average $5.93/MMBtu in 2005 because the underlying gas supply/demand balance remains tight "as evidenced by the persistence of $6 gas, considering the warmer than normal weather during this winter."
EEA expects a 1.1% increase in Lower-48 gas production to 51.3 Bcf/d, and a 25% increase in LNG imports to 2.5 Bcf/d. Canadian imports are expected to be flat to slightly higher.
The consulting firm expects prices to remain relatively high and volatile over the next few years. With normal weather next winter, EEA predicts prices will average $7 in 2007.
In comparison, EVA painted a similar picture in its Fuel Cast Short Term Overview but is more bearish when it comes to the longer-term price outlook. "The U.S. gas market is in a supply-limited environment and likely will remain in that condition through 2006," EVA said. "While the outlook for supply has improved, albeit moderately, the increased levels of supply will be required to meet projected growth in demand."
EVA forecasts that gas demand will grow 3.6% this year from the suppressed demand levels in 2004, which had a mild summer. Nearly 60% of the projected demand growth will occur in the power generation sector.
The modest increase in gas supply is expected to result from record gas-directed drilling, a significant increase in long-lived nonconventional production (shales, tight sands and coalbed methane), six major new deepwater discoveries (1.2 Bcf/d), a rebound in production from repairs after Hurricane Ivan and from a reduced dependency on the rapidly declining shelf production in the Gulf of Mexico, EVA said.
In addition, LNG imports are expected to reach 2.3 Bcf/d this year and 3.2 Bcf/d next year from about 1.8 Bcf/d in 2004. "With respect to the intermediate-term outlook for LNG imports, at present there are six North American LNG projects under construction and another four could commence construction in the first half of 2005 (i.e., total capacity is 9.8 Bcf/d)."
Meanwhile, Canadian imports also are rising modestly. "This improved outlook for natural gas supply, albeit a modest improvement, should ease some of the upward pressure on gas prices, particularly with season ending storage levels projected to be near record highs for that time of year," EVA said. "However, this projected price moderation is heavily dependent upon reasonable winter and summer weather and a lack of a major hurricane in the Gulf."
EVA expects Henry Hub prices to average $5.72 this year, $5.55 next year and $4.36 in 2007.
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