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Lower Prices, Adequate Storage Forecast for Winter, FERC Says

The prospects for U.S. natural gas markets this winter are in much better shape than they were just a few months ago, with gas storage above the five-year average, the National Weather Service (NWS) predicting a relatively mild winter and robust production continuing onshore, FERC staff said Thursday.

The Winter Energy Market Assessment for 2008-2009, issued by staff of the Federal Energy Regulatory Commission's (FERC) Office of Enforcement, offered a positive outlook for lower gas prices in the months ahead following a period in early summer when both gas and oil prices rose to unprecedented levels (see NGI, July 14).

"Henry Hub spot prices so far this year have averaged almost $9.58/MMBtu -- up about $2.62/MMBtu from last year," said FERC's Arnie Quinn. "What triggered the large average increase in prices this year is what everyone saw in the market in the first half of 2008, when gas prices at the Henry Hub broke out of the five-year range and peaked at $13.32/MMBtu on July 3." Since then, spot natural gas prices have returned to the five-year normal range.

Despite these large swings in commodity prices, the winter outlook for gas prices at Transco Zone 6 NY based on forward pricing "is strikingly similar to the outlook the market had last year at this time," the report noted. In fact, the forward prices for Henry Hub "are slightly lower than last year's forward prices."

At this point, FERC staff also is confident that the United States will have sufficient gas in storage to meet winter demand. At current injection rates, storage could almost reach capacity of 3,789 Bcf by November.

"Along with storage inventories and weather, we believe the growth in domestic natural production this year should have a significant influence on prices this winter," the report stated. Production grew almost 9% through the first seven months of 2008 and the Energy Information Administration (EIA) estimates that Lower 48 gas production for the entire year will rise by 7% compared to 4% for 2007. A September dip in production due to hurricanes Ike and Gustav removed an estimated 200 Bcf of cumulative gas production.

"Expectations for growth in winter gas demand are not quite as robust as the growth in supply," said staff, which cited several factors that have the potential to slow demand. The NWS currently is forecasting a warmer-than-normal winter for most of the country, and "any slowdown in economic activity would erode some of this growth in demand."

Other market fundamentals could influence more gas use. Because gas is currently cheaper than heating oil, residual fuel oil, and in some places even coal, "this could put upward pressure on gas needs if these relationships persist. So far this year, some analysts report increased industrial gas use despite higher spot prices." EIA's latest short-term outlook indicates a modest gain of 900 MMcf/d, or 1.3%, for U.S. gas use this winter compared to last winter (see NGI, Oct. 13).

A "wildcard" in the supply/demand balance is liquefied natural gas (LNG) imports, "which fell substantially this year compared to last," the report noted. The "outlook is very dynamic, with recent news changing some of our expectations." EIA, said staff, has estimated that U.S. LNG imports will average about 1 Bcf/d this winter, or about what the United States has imported on average so far in 2008. Moreover...forward prices in the U.S. are expected to be lower than in competing markets and this is affecting LNG cargo expectations..."

Most of the recent growth in gas production has come from unconventional gas sources, the staff report noted. "U.S. conventional gas production fell 24% between 1998 and 2007, from 37 Bcf/d to 28.5 Bcf/d. Meanwhile, gas production from unconventional gas sources (shale, tight sands, coalbed methane and deep gas) grew at an average annual rate of 6.4% between 1998 and 2007, from 14 Bcf/d to 25 Bcf/d and "could soon become the dominant source of gas production in the U.S."

Oil and gas prices have fallen from their mid-year highs, but gas prices remain "well below" heating oil prices on a per MMBtu basis, noted FERC staff. "Forward market prices now show that delivered gas at Transco Zone 6 NY averages about $10.50/MMBtu, representing about a $10/MMBtu discount to heating oil. This disparity in prices is affecting homeowner heating fuel decisions."

According to the FERC report, Wachovia Research reported that NStar, which serves natural gas customers in Massachusetts, said that "inquiries about converting to natural gas from oil were five times higher during the first five months of 2008 than over the same period in 2007. At NiSource subsidiary Bay State Gas (also serving Massachusetts) conversion requests were up 97% for the same time periods. On Long Island, National Grid indicates that 12,000 homeowners had contacted it about switching to gas during the first seven months of 2008, more than double a year earlier."

The report offered mostly good news for electricity customers this winter.

"Other than in the Northeast forward electric prices for the coming winter are between 8% and 13% lower compared to winter forward prices at this time last year," FERC staff noted. Forward electric prices in the Northeast are up to 6% higher than prices last year.

The drop in forward electric prices for most of the country "more or less matches expectations for lower natural gas prices at the Henry Hub. However, the increase in electric forwards in the Northeast matched the increase in Northeast forward gas prices...

"High basis last year in the Northeast would appear to be influencing expectations for Northeast basis this coming winter," the report stated. "Last winter, basis at Transco Zone 6 averaged $2.76 from November 2007 to March 2008, 83 cents higher than the previous year, and the highest average winter basis we have ever seen. Northeast gas prices were more volatile last winter than any other winter."

The staff report noted "28 instances of basis greater than $5, double the number of instances from the 2006/2007 winter. Finally, forward prices for New York are also likely influenced by the fact that fuel oil will be on the margin for part of the time this winter."

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