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Spot Prices in 2013 Return to '09-'11 Levels, Says EIA

Spot prices for U.S. natural gas at most major trading points increased on average 40-60% in the first half of 2013 (1H2013) from a year earlier as demand eclipsed supply, the U.S. Energy Information Administration (EIA) reported last week.

"Price increases were relatively uniform throughout the country, with the exception of New England and New York, where supply constraints caused spot prices to spike when demand peaked this winter," said analysts.

Several factors acted simultaneously to constrain gas deliveries at the Algonquin Citygate trading point in New England, where gas from the West and South flowed "at or near capacity of existing pipelines." Also, liquefied natural gas shipments into the Boston area and New Brunswick areas declined in 2012 as global market conditions directed shipments elsewhere. In addition, gas wellhead production from the Sable Offshore Energy Project offshore Nova Scotia dropped to a small fraction from levels in previous years.

"Price differences between Henry Hub and most western trading hubs averaged less than 10 cents/MMBtu," noted EIA.

Henry Hub, a key benchmark and major trading location, saw spot prices average $3.75/MMBtu in 1H2013, 57% higher than year-ago averages of $2.39/MMBtu. "However, this year-over-year price increase principally reflected the extremely low prices in 2012," EIA's analysts noted. "Spot prices so far in 2013 are very similar to levels seen in 2009 to 2011."

In its Short-Term Energy Outlook (STEO) published earlier this month, EIA said Henry Hub spot prices averaged $3.83/MMBtu in June (see NGI, July 15). EIA also forecast that Henry Hub prices would average $3.76/MMBtu in 2013 from 2012 averages of $2.75/MMBtu.

Several factors contributed to the return of gas prices closer to $4.00/MMBtu in the 1H2013, including colder winter temperatures year/year," despite declining power burn, noted analysts. "Overall, natural gas consumption was up by more than 3% through the first half of this year."

A combined increase in residential, commercial and industrial consumption of 5.6 Bcf/d from the year-ago period "more than compensated for a 3.3 Bcf/d decline in power sector consumption. As a result, total demand rose faster than total supply, which contributed to upward pressure on prices." There also was a return to more seasonal winter temperatures, "following an abnormally warm winter in 2011-2012," which drove residential and commercial consumption 20% higher in the first six months of this year and "contributed to price spikes for natural gas and power in New England..."

Power sector gas consumption was 14% lower from year-ago record levels, but power burn has remained higher than in several past winters and 20% above the January-June average from 2007-2011, said EIA.

"U.S. dry natural gas production continued to grow during the first half of 2013, albeit at a slower pace compared to prior years," analysts noted. "According to Bentek Energy, U.S. dry natural gas production was up 1.8% during the first 6 months of 2013 compared to increases of 5.6% and 7.3% during the first halves of 2012 and 2011, respectively.

"Significant production gains that began in 2010 as a result of rapid growth in supply from shale basins began to slow at the beginning of 2012," mostly in response to lower prices. "Slowing production growth continued through the first half of 2013, limiting the overhang of supply and resulting in rising prices."

Marcellus Shale production growth has continued, up about 50% year/year in 1H2013, analysts noted (see related stories). Meanwhile, U.S. storage inventories fell below five-year averages in the first six months from a year earlier.

"Large withdrawals of Lower 48 natural gas storage inventories at the end of March pushed stocks below their five-year average levels for the first time since August 2011. This year's cold March temperatures led to high inventory draw downs that month," and cold March weather led to high gas withdrawals "well into April, when net storage injections would normally begin to take place."

The bigger storage withdrawals "counter-balanced higher total natural gas demand, which was only partially offset by slightly rising dry natural gas production, and as a result inventories fell," EIA's team noted. Even with "relatively high injections" during May and June, storage has remained below its five-year average, which supported gas prices of about $4.00.

EIA in its STEO this month said it was projecting that Lower 48 working inventories would be about 3,809 Bcf by the end of the injection season on Oct. 31, "with injection levels similar to those in 2008-2011 but much higher than in 2012.

Domestic natural gas trends show "very encouraging" signs, which has led Wunderlich Securities to raise its price forecast for 2013 by 45 cents and 2014 projections by 50 cents. Based on the bullish trends, Wunderlich raised its 2013 gas price forecast to $3.70/Mcf from $3.25. The 2014 forecast is also for $3.70/Mcf, up from $3.20.

Henry Hub gas prices in 2Q2013 "acted better than expected again," averaging $4.02/Mcf, compared with $3.48 in the first three months of this year, analysts noted. "A later-than-normal winter boosted commercial and residential demand and offset a drop-off of power demand." U.S. production in the aggregate "looks relatively flat, which is helpful, and total natural gas in storage is slightly below the 2008 to 2012 (five-year) average. All these trends are very encouraging, in our opinion."

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