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EIA: Industrial Slowdown to Stunt Prices Through Year's End

The convergence of abundant natural gas supplies and weak demand, driven by an 8% decline in industrial-sector consumption, will keep the Henry Hub spot price below $4/Mcf until late this year, but economic growth could boost industrial consumption and prices to an average $5.49/Mcf in 2010, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for June.

"Prices remain low as natural gas supplies continue to seep into a weak market. As working natural gas inventory nears storage capacity limits, prices may need to decline further to induce necessary adjustments in supply or stimulate demand," said the agency outlook. "Anticipated economic recovery and seasonal space-heating demand are expected to contribute to some price strength in early 2010, and enhanced production capability from domestic supply sources is expected to limit sustained upward price movements throughout the forecast period."

Total natural gas consumption is projected to decline by 2.2% in 2009 and then increase slightly in 2010, according to the EIA outlook. While the broad economic downturn will hold down industrial-sector consumption, that decline will be partially offset by a 2.7% increase in electric power-sector consumption, which EIA said it expects as low natural gas prices persist into the fourth quarter. Additional declines expected in the residential and commercial sectors this year also contributed to EIA's lower consumption estimate.

EIA estimates that total U.S. marketed natural gas production will decline by 1.1% in 2009 and by 2.6% in 2010. Baker Hughes recently said there are 685 rigs actively exploring for gas in the United States, which is down 57% from the 1,606 rigs that were operating during the week ending Sept. 12, 2008 and 53% lower than the 1,493 rigs that were searching for gas one year ago. Although a corresponding decline in production has yet to appear in data through March, EIA said total U.S. marketed production is expected to drop by nearly 5 Bcf/d between the first and fourth quarters of 2009. The decline in annual production is expected to occur almost exclusively in the non-Gulf of Mexico (GOM) Lower 48 states, more than offsetting a small expected increase in GOM output, EIA said.

This year's drilling pullback is expected to lower production in 2010, but EIA does not believe working rigs and natural gas prices need to return to 2008 levels for production to increase.

"Recent improvements in technology have reduced finding and development costs, lowered completion times and greatly enhanced well productivity, increasing the production potential from domestic sources," according to the EIA report. "As a result, production is expected to respond adequately, with a shorter lag, to sustained increases in demand."

EIA expects weakness in the global liquefied natural gas (LNG) market to drive an increase in LNG imports to about 495 Bcf in 2009, compared with 352 Bcf in 2008. Severe economic contractions in Asia have increased the amount of LNG available in the global market, elevating purchases in Europe, where natural gas prices remain slightly above those in the United States. As storage facilities in Europe are replenished in coming months and new liquefaction capacity comes online, available LNG cargoes are expected to be directed to U.S. terminals, EIA said.

"While there is still a degree of uncertainty associated with the start-up of new liquefaction capacity and the availability of shipments, higher-than-expected LNG imports would almost certainly have a dampening effect on prices and cause lower domestic natural gas production or pipeline imports," according to the outlook.

At the end of May working gas in storage was 2,337 Bcf, 423 Bcf above the five-year average and 546 Bcf above the level during the corresponding week a year ago. Working gas inventory is projected to peak at about 3,659 Bcf at the end of October, exceeding the previous record of 3,565 Bcf reported for the end of October 2007, EIA said.

EIA estimates production shut-ins on the U.S. Gulf Coast during the upcoming hurricane season of about 36 Bcf of natural gas and 4.5 million bbl of crude oil. The consensus among forecasters seems to be that the hurricane season will be mild this year (see NGI, June 8).

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