The financial meltdown, combined with the steep slide in crude oil prices and growth in domestic production, has been a constant drag on natural gas prices over the past months and relief isn't expected anytime soon, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for November.
"The Henry Hub spot price averaged $6.94/Mcf in October, 94 cents/Mcf below the average spot price in September. The slowing economy, continued growth in domestic natural gas production and the significant decline in oil prices have led to a dramatic shift in expectations for natural gas prices over the forecast," the EIA said in the outlook, which was released last Wednesday.
Despite the drop in gas prices, "household heating expenditures this winter are expected to be slightly higher than last year due to pass-through of some higher-priced natural gas that was put in storage earlier in the year to meet winter demand. Beyond the winter, the weak economy and continued growth in onshore natural gas production are expected to keep prices relatively low."
For the year, the EIA projects that spot gas prices will average $9.25/Mcf compared to $7.17/Mcf in 2007. It sees the average spot price falling to $6.82/Mcf in 2009, $1.35/Mcf less than what was forecast for 2009 in its October outlook.
On the supply front, the agency projects that domestic marketed gas production will increase by 6% to 58.50 Bcf/d this year and by 2% to 59.65 Bcf/d in 2009. Production activity from unconventional fields in Texas, Wyoming and Oklahoma is expected to push supply from the onshore Lower 48 up by almost 10% this year to 50.93 Bcf/d, according to the EIA. "While continued onshore production growth is expected in 2009, lower average prices and poor economic conditions are [likely] to limit the expansion of supplies to 1.9%."
One of the big disappointments will be Gulf of Mexico (GOM) production. As a result of the hurricanes, "federal GOM production is now expected to decline by 14.8% [to 6.47 Bcf/d] as repairs to supply infrastructure continue, while 2009 growth of 2.7% [to 6.65 Bcf/d] reflects the expectation of further recovery and less shut-in production during the 2009 hurricane season," the agency said.
Liquefied natural gas (LNG) imports also have had a bad year. "Strong global demand, supply constraints and lower relative U.S. natural gas prices have all contributed to the decline in U.S. imports of liquefied natural gas, which are expected to fall from 770 Bcf in 2007 to 350 Bcf [this year]." However, "the limited natural gas storage facilities in LNG-consuming nations outside of the United States could lead to higher U.S. LNG import growth in 2009, particularly during the storage injection season...as more global LNG capacity is brought online," the EIA said.
Surprisingly, the agency reported that natural gas consumption this year is expected to be higher in every sector except electric power, which has led the growth in gas demand in past years. Consumption for power generation this year is pegged at 18.40 Bcf/d, down from 18.83 Bcf/d in 2007. Overall, the EIA anticipates that consumption will increase 1.1% to 63.88 Bcf/d this year and fall by 0.2% to 63.78 Bcf/d in 2009.
Inventories were 3,405 Bcf at the end of October, 78 Bcf above the five-year average and 130 Bcf below the level during the corresponding period last year.
Electricity consumption by residential consumers is expected to fall by 0.5% to 3.80 billion kilowatt hours per day (kWh/d) this year due to the cooler weather in the latter part of the summer, the EIA said.
"The economic slowdown will impact consumption in all sectors during 2009, particularly the industrial sector, which is now expected to decline by 2.5% [to 2.70 billion kWh/d] next year in contrast to the 0.2% decline projected in last month's outlook," the agency said. Total electricity consumption is expected to remain flat at 10.67 billion kWh/d this year and dip slightly to 10.61 billion kWh/d in 2009.
The EIA noted that the recent drop in power generation fuel costs has caused some utilities to reconsider the steep price increases announced this past summer. "However, fuel costs still remain high, and it is unlikely that electricity rates for most customers will fall significantly in the near term. U.S. residential electricity prices are expected to increase by about 6.5% [to 11.3 cents/kWh and to 12 cents/ kWh] in both 2008 and 2009," respectively.
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