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EIA: Gas to Average $5 in 2010, Consumption Decline to Continue

The Henry Hub annual average spot price could increase to as much as $5.02/Mcf in 2010 from $3.85/Mcf this year, the Energy Information Administration (EIA) said in its latest Short-Term Energy Outlook, released last Tuesday. Total natural gas consumption, which is projected to decline by 2% in 2009, will decline another 0.2% next year, EIA said.

Weak economic conditions continue to hamper the industrial sector, where consumption was down by 12.4% through July compared with the same period last year. "With lower consumption in the residential and commercial sectors as well, natural gas use in the electric power sector continues to serve as the only demand outlet for increased natural gas supplies," EIA said.

The Henry Hub spot price averaged $3.06 in September, 17 cents below the average spot price in August. Spot prices fell in early September before rebounding as pipeline maintenance reduced availably supply and gas-fired electric generators increased demand. EIA said it expects prices to increase in 2010 but said relatively large end-of-March inventories, lower break-even costs for domestic production and growing global liquefied natural gas (LNG) supply should limit sustained price increases.

Electric power sector consumption increased by 0.4% through July compared with the same period last year, despite a 5.3% decline in total electricity generation over the same period, according to the report. Low natural gas prices are expected to prolong the preferred use of natural gas in place of coal for electricity generation in some regions until space heating demand picks up this winter. A forecast of fewer cooling degree days next year, combined with higher natural gas prices and the start-up of new coal-fired generating capacity, is expected to contribute to a reduction in gas-fired electric generation in 2010, EIA said.

Total U.S. marketed natural gas production is expected to decline 3.8% in 2010 after increasing 1.5% this year, according to EIA. Marketed natural gas production in the Lower 48 states increased 2.9% through July, despite a more than 40% decline in the working rig count since the beginning of the year, but EIA expects the pullback in drilling to lead to a 3.6% decline in Lower 48 production from the first half of the year to the second half.

While the working rig count has begun to increase slightly in recent weeks, EIA expects domestic production to continue to fall, with marketed production during the first half of 2010 to average about 1.8 Bcf/d lower than the second half of 2009. "However, economic recovery and increasing demand next year are expected to push prices up and provide the incentive for increasing production later next year," EIA said.

Natural gas inventories are expected to set a new record high of more than 3.8 Tcf at the end of this year's injection season, according to EIA. On Sept. 25 working storage was 3,589 Bcf. Current inventories are 481 Bcf about the five-year average and 491 Bcf above the level during the corresponding week last year.

LNG imports, which increased from 352 Bcf in 2008 to 471 Bcf this year, are expected to continue increasing to about 660 Bcf in 2010, as cargoes are redirected from Europe, where storage is reaching capacity and prices have declined, EIA said. The startup of several large LNG projects in 2010 will also drive the increase of LNG imports.

Coal consumption in the electric power sector fell by 11% in the first half of 2009 compared to the first half of 2008, the result of lower total electricity generation combined with increases in generation from natural gas, nuclear, hydropower, and wind, EIA said. Lower electric power sector coal consumption is expected to continue through the end of the year, with the total annual decline projected at more than 9%. With demand for electricity projected to grow and gas prices projected to rise in 2010, coal is expected to regain a larger share of the baseload generation mix beginning in 2010.

Projected carbon dioxide (CO2) emissions from fossil fuels are down 5.9% in 2009, driven primarily by changes in energy consumption in the industrial sector and changes in electricity generation sources, EIA said. EIA estimated that the combined effects of the decline in consumption of coal and natural gas in the industrial, commercial, and residential sectors, the substitution of natural gas for coal in the electric power sector, and a forecast increase in non CO2-emitting electricity generation accounted for 70% of the total projected 2009 decline.

Global CO2 emissions could fall at a record pace of up to 3% this year because of the recession, which has reduced the demand for power, according to the International Energy Agency (see related story).

EIA expects households heating primarily with natural gas to spend an average of 12% ($105) less this winter, reflecting an 11% decrease in prices and a 1% decrease in consumption. Households heating primarily with electricity can expect to spend an average of 2% ($20) less than last winter.

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