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EIA: Sub-$4 Gas Through Late 2009; Nearly $6 in 2010

With consumption expected to decline by 2.3% this year and inventories remaining well above five-year averages, the monthly average Henry Hub natural gas spot price is expected to remain below $4/Mcf until late in the year, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for July.

EIA projected an increase in the Henry Hub price from an average of $4.22/Mcf in 2009 to an average of $5.93/Mcf in 2010 as expected economic growth increases industrial consumption. EIA's projected average price for 2010 is up significantly from last month, when the agency forecast an average $5.49/Mcf in 2010 (see NGI, June 15).

The sub-$4 forecast was prompted by a 2.3% consumption decline projected for 2009 and the prospects of unchanged consumption in 2010, EIA said.

"Poor economic conditions are expected to prolong the current slump in natural gas demand over the coming months, led by an 8.2% drop among industrial users in 2009," said the agency outlook, which was released last Tuesday. "While consumption is expected to fall in the residential and commercial sectors as well this year, competitive natural gas prices relative to coal are projected to lead to a 2.4% increase in electric power sector consumption in 2009. Slight consumption increases in the residential, commercial and industrial sectors next year are expected to result from the projected economic recovery. Natural gas consumption in the electric power sector is expected to decline by 1% in 2010 as natural gas prices rise and coal regains a larger share of the baseload generation mix."

Despite low prices -- the Henry Hub spot price averaged $3.91/Mcf in June, 5 cents below the average spot price in May -- natural gas marketed production in the Lower 48 non-Gulf of Mexico (GOM) increased by 1.9 Bcf/d (3.7%) on a year-over-year basis in April, according to the agency outlook.

"Although U.S. natural gas production is projected to decline over the coming months, historically high storage levels and limits to storage capacity may cause prices to decline further this fall."

Prices are expected to recover in early 2010 as the market balance tightens, but rising prices are expected to be tempered by improvements in the productive capacity of domestic onshore supply sources, EIA said.

Many investment banks and energy consultants don't see gas prices recovering in 2010 -- and some think prices won't recover for up to four years (see related story).

EIA estimates that total U.S. marketed natural gas production will decline by 0.6% in 2009 and by 2.9% in 2010. Baker Hughes Inc. on Friday said there were 672 rigs actively exploring for gas in the United States, 16 fewer than a week earlier and 56% fewer than the year-ago level. The resulting production decline from the drop in rigs is expected to occur almost exclusively in the Lower 48 non-GOM region during the second half of this year.

EIA expects liquefied natural gas (LNG) imports to increase to about 506 Bcf in 2009 from 352 Bcf in 2008 due to a combination of weak demand and growing supply in the global LNG market. While lower demand for LNG in Japan and South Korea has increased the amount of LNG available on the global market, leading to larger purchases in China and Europe, lower global demand is expected to increase available LNG cargoes for import by the United States.

As of July 3 working gas in storage stood at 2,796 Bcf, 601 Bcf above the level during the corresponding week a year ago.

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 related story).

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