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EIA Sees Economic Woes Dropping 2009 Natural Gas Prices, Consumption

January 19, 2009
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Despite the fact that natural gas consumption grew by 0.7% within the United States in 2008, the Energy Information Administration (EIA) said last week that the economic downturn will likely lead to a 1% drop in 2009 before gaining 0.7% again in 2010, according to the government agency's latest Short Term Energy Outlook.

The EIA's study also expects the current economic woes to catch up with gas prices in 2009. It projects that the Henry Hub natural gas spot price will decline from an average of $9.13/Mcf in 2008 to $5.78/Mcf in 2009, but then increase in 2010 to an average of $6.63/Mcf.

The agency attributed the 0.7% consumption growth in 2008 to the 5.8% increase in heating degree days year-over-year. "The demand outlook for 2009 is largely driven by expectations of continued economic weakness," EIA said in the report. "The slight consumption growth projected in the residential sector is expected to be more than offset by consumption declines in the commercial, industrial and electric power sectors this year."

The natural gas-weighted industrial production index is projected to fall by 6.6% in 2009 while the industrial sector gas consumption is expected to decline by 3%. EIA said consumption growth in 2010 is expected to be limited to the electric power sector, with all other sectors expected to decline slightly.

While the Henry Hub spot price averaged $9.13/Mcf in 2008, EIA noted that in December it had dropped to $5.99/Mcf, giving a glimpse of the prices to come. "Weak natural gas demand associated with poor economic conditions together with strong domestic production growth contributed to the recent decrease in prices that is expected to persist in 2009," EIA said. "As consumption reacts to worsening economic factors, natural gas prices may need to fall further than currently forecast in order to restrain production activities and balance the market during the second half of 2009, particularly as inventory nears storage capacity." Assuming the economy improves in 2010, prices are expected to begin to increase that year.

Rotating over to U.S. production and imports, data show a strong 2008, with further growth coming in 2009. EIA found that total U.S. marketed natural gas production is estimated to have increased by 5.9% in 2008, led by the development of unconventional reserves in the Lower 48 States. The agency said it expects total marketed production to increase by 0.7% in 2009 and then decline by 0.9% in 2010.

"Producers have already begun to react to lower prices and the outlook for lower consumption as evidenced by the recent pullback in drilling activity," EIA said. "The number of rigs drilling for natural gas in the Lower 48 onshore region has fallen from about 1,540 in August 2008 to under 1,200 at the beginning of January 2009." Despite the cutback, EIA said the current outlook suggests that further production curtailments may be necessary during the latter part of 2009 in order to balance the market.

Lower 48 production outside the Gulf of Mexico (GOM) region is expected to increase by 1% in 2009. Although drilling activity is expected to begin recovery in 2010, production is projected to decline relative to 2009 by 4.7% in the federal GOM and by 0.4% in the Lower 48 non-GOM, EIA said.

On the liquefied natural gas (LNG) front, U.S. imports are estimated to have totaled about 350 Bcf in 2008 and shipments of LNG to the United States are currently expected to rise to about 420 Bcf in 2009. "However, limits to natural gas storage capacity outside the United States could unexpectedly boost U.S. imports of LNG during the summer months if global demand for natural gas does not increase as expected," the agency said. "U.S. LNG imports in 2010 are projected to reach a little more than 500 Bcf."

EIA said the ample amount of gas in U.S. storage could lead to a record level of gas in the ground by the end of the next injection season. On Jan. 2 working natural gas in storage was 2,830 Bcf. Current inventories are now 87 Bcf above the five-year average (2004-2008), and 31 Bcf above the level during the corresponding week last year. According to EIA math, storage inventories are expected to finish the 2008-09 winter season (March 31) at more than 1.5 Tcf, about 270 Bcf above the corresponding period last year, but below the 1.7 Tcf mark recorded in 2006. "The expected supply overhang throughout the 2009 injection season (April 1 to Oct. 31) is projected to send the resulting working gas inventories near the previous high reported on Nov. 2, 2007," EIA said.

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