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NGSA: Colder Winter Means 'Soft' Upward Price Pressure

In the fall, a natural gas producer's heart turns to selling more gas at higher prices. This winter should be somewhat colder -- and more rewarding to producers -- than last, according to the Natural Gas Supply Association's (NGSA) Winter Outlook, released last Wednesday.

"When NGSA weighed all the different pressure points, the picture that emerged for this winter is one of increased demand for natural gas that is easily matched by ample production and gas in storage," said NGSA Vice Chairman Greg Vesey, who also is president of Chevron Natural Gas. "When all the factors are combined, we expect soft upward pressure on prices compared with last winter."

There will, however, be plenty of gas to meet demand and continue fueling the U.S. industrial renaissance, which has seen industry return from overseas because of low-cost natural gas, Vesey said. "This is a very good story for the U.S. in terms of improving energy security and creating jobs and bolstering the economy. That's certainly part of the key message this year."

An independent demand analysis performed by Energy Ventures Analysis (EVA) shows that natural gas demand will be higher than last winter. The firm is projecting overall demand at 83.8 Bcf/d compared with 78 Bcf/d last year, NGSA said. When all sectors are combined, overall demand is expected to increase by 5.8 Bcf/d, about a 7% increase from the winter of 2011-2012.

"The higher demand forecast is primarily due to NOAA's [the National Oceanic and Atmospheric Administration] prediction of colder winter weather, which would in turn increase the amount of natural gas consumed by residential and commercial customers by 16%," Vesey said. "According to...NOAA data, last winter was the warmest on record from November through March. NOAA forecasters are predicting a return to normal (colder) winter weather patterns this winter."

December through February is expected to be 20% colder than last winter on a national average. On a regional basis, NOAA forecasts colder-than-normal weather in South Texas and most of Florida, with warmer-than-normal weather in the Midwest and normal winter temperatures in most of the remaining United States. Over the full five-month winter heating season (November-March), EVA forecasts 3,544 heating degree days (HDD) this winter, compared with 2,964 HDD last winter.

Demand from the industrial sector -- which takes its cues from the economy rather than weather -- is expected to be comparable to last winter, according to EVA. However, EVA said an extended forward view shows that dozens of new, expanded and restarted natural gas-intensive industrial projects loom on the 2012-2018 horizon.

This heating season, public forecasts anticipate an economy that will grow slightly but at a lower rate than last winter, NGSA said. The gross domestic product (GDP) is expected to show less growth compared to last winter. According to forecasting firm Global Insight, GDP is expected to increase 1.7% compared to last winter.

Manufacturing is projected to improve by 3% this winter, compared to last year's 4.7%. The official unemployment rate is predicted to drop slightly to just over 8%, and inflation is forecast to increase at a "minimal amount," NGSA said. "Weak growth" in the economy is projected to place modest demands on natural gas. NGSA said it expects winter-to-winter pressure on the gas market to remain flat due to these economic constraint factors.

Gas demand from power generators also is expected to be about the same as last winter as operators continue to dispatch gas plants over coal, although to a lesser degree, NGSA said. "Fuel switching is expected to continue for a fourth straight year, but switching is forecasted to be 4.9 Bcf/d rather than last winter's unprecedented 6 Bcf/d," said Vesey. The decreased amount of fuel switching still exceeds all winters prior to last winter, NGSA said.

The natural gas supply story has been getting out to power generators, and power generation portfolios are switching over to natural gas, Vesey told NGI. "They believe in the reliability and the affordability of [natural gas]," he said. It's no secret that domestic gas supplies are robust; however, Vesey pointed out that they also are more flexible than in years past. "Natural gas supply can now respond quite swiftly to changes in demand," he said. "There are numerous completed wells in shale areas that are not yet producing natural gas but can be quickly accessed and flowing gas when the market calls for more supply."

ICF International is estimating average winter production at almost exactly the same amount as last winter, even though there are 37% fewer gas-directed drilling rigs and 33% fewer annual well completions. "Multiple wells are now being horizontally drilled from a single drilling site, which is one of the reasons that rig count is no longer a strong indicator of production."

"The important takeaway is the strength and responsiveness of supply," Vesey said. "Since the onset of shale production on a large scale, we've had four straight winter forecasts for level price pressure. Natural gas suppliers stand ready to meet natural gas demand and customers' needs."

ICF forecasts winter production at approximately 64.8 Bcf/d, nearly flat compared with last winter's 64.9 Bcf/d, and attributes continued high domestic production to higher production rates per existing well, concentration in play sweet spots, the lag between shale well drilling and production in some areas and increased production of associated gas from tight oil and liquids plays. Imports from Canada will average 5.5 Bcf/d, an increase of 1 Bcf/d or 22% relative to last winter, according to ICF. Last winter, Canadian imports were "uncharacteristically low" because of the warm weather. Imports of liquefied natural gas are expected to stay level at about 0.7 Bcf/d, and Mexican exports are forecasted to remain constant at about 1.2 Bcf/d, NGSA said.

Going into the winter heating season, it is projected that 3,900 Bcf of natural gas will be in storage, compared to the 3,800 Bcf in storage last year. The amounts are similarly robust, and ample storage levels are expected to place level pressure on natural gas prices this winter, NGSA said. NGSA used data from EVA for its demand projections and data from ICF for its supply projections. The association's analysis is based on publicly reported data; the association does not project actual cost figures for wholesale or retail markets.

The average natural gas customer's bill might rise 7% during the upcoming heating season due to colder weather than last winter, the American Gas Association (AGA) said Thursday. Still, the AGA, which represents natural gas utilities, said total winter heating bills should remain among the lowest in the past decade, even in the face of an anticipated cold winter season on a nationwide basis.

"The fact that we are looking at only a slight rise in consumer bills in the face of [potentially] higher use points to a new era in natural gas markets," said Chris McGill, AGA vice president of policy analysis. "This is not your grandfather's natural gas industry."

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