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Barclays Team Finds Surprises, Trends in Gas Market This Year

With the year drawing to a close, Barclays Capital analysts compiled a "best of" list for what they considered to be the 10 biggest surprises in the natural gas market in 2009 and implications for 2010.

Coal displacement led the list, which was compiled by Barclays' Jim Crandell, Biliana Pehlivanova and Michael Zenker. Gas, they wrote, "displaced coal to a much greater extent than expected" this year. The displacement was isolated to the Southeast, Mid-Atlantic and Northeast markets, but the boost in gas consumption, they wrote, was enough to offset lower gas use in other parts of the country and by itself lifted annual gas consumption for the power sector above 2008 levels.

In the No. 2 position, the trio noted that even with the drastic cut to drilling by summer compared with a year ago, gas supplies did not follow the rig rate lower. Some forecasters, they said, anticipate that gas supplies will fall 3-4 Bcf/d in 2010 compared with this year's levels. "But thus far, supply has consistently tracked higher than our estimate...suggesting that the rig count need not climb much higher before aggregate U.S. supply growth resumes."

The big story -- shale -- is a "gift that keeps on giving," and it's difficult to gauge "just how big shale supply potential might be," said Crandell and his colleagues.

"While horizontal drilling equipment is not yet available at Wal-Mart, even small producers can get their hands on the latest technology (or something not far from it)," said the Barclays team. "From today's vantage point, only producer restraint, and uncertain longer-term decline rates, could limit the resource potential of shale."

The Barclays team said these events also surprised the gas market this year:

With the unexpected events of 2009, some implications for the gas market in 2010 are clear, said the trio.

If gas had not displaced some coal this year, "the market would have been buried in surplus gas," said the analysts, and "gas will lose this extra demand unless it prices at levels competitive with coal prices in 2010. We expect that gas will be forced to coal equivalents in [2Q2010 and 3Q2010], and when it does not price competitively, demand will be lost versus 2009 levels."

Gas storage levels also were on track to set a record which was expected to "crush gas prices in October and November..." However, the market "digested the additional gas without serious consequences to the physical market," suggesting that the "U.S. storage complex is both larger and more flexible than anticipated."

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