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EIA: Winter Gas Prices to Hover Around $5/Mcf

With a record amount of natural gas in storage and "resilient" domestic gas production, the Energy Information Administration (EIA) expects spot prices to hover in the $5/Mcf range during the winter season, "even as space-heating demand increases and economic conditions improve." The agency also anticipates that gas consumption by power generators will drop next year due to potentially higher gas prices and the addition of new coal-fired generation capacity.

The Henry Hub spot price "averaged $4.12/Mcf in October, $1.06/Mcf higher than the average spot price in September...Although prices have more than doubled since reaching a low of $1.83/Mcf on Sept. 4, EIA expects any further price run-up to be limited through the remainder of the year," the agency said in its Short-Term Energy Outlook for November, which was released last Tuesday.

Heading into winter the EIA projects that spot prices will average $4.22/Mcf this month, more than $2.60/Mcf less than a year ago. Inventories for the last week of October were at a record level of 3.8 Tcf -- 414 Bcf above the five-year average and 379 Bcf above the level during the corresponding week last year, the agency said. It estimates that the average spot price will be $4.03/Mcf this year and $5.01/Mcf in 2010.

Assuming a winter storage withdrawal of about 14% (240 Bcf) greater than the previous five-year-average (October 2004-March 2009), end-of-winter stocks (March 2010) will be about 1,739 Bcf, the EIA estimated. This would be the highest end-of winter storage level since 1991, when inventories measured 1,912 Bcf.

The EIA projects that total gas consumption will decline by 1.9% to 62.2 Bcf/d this year and by another 1.1% to 61.49 Bcf/d in 2010. "While the broad economic downturn led to a drop in total consumption in 2009, low prices have contributed to a 2% increase in natural gas use in the electric power sector from January through August of this year compared with the same period in 2008," the agency said.

But natural gas consumption by the electric power sector is projected to decline to 17.92 Bcf/d in 2010 from 18.85 Bcf/d this year, according to the EIA. This is expected to be more than offset by the growth in gas demand in the residential, commercial and industrial sectors.. "The anticipated addition of new coal-fired generating capacity combined with higher natural gas prices should reverse the coal-to-natural gas switching trend that accounted for the large increase in electric power sector natural gas consumption this year," the agency said.

"Nearly 4,300 MW of new coal-fired generation, online by the end of 2010, will add to the demand for coal. Projected coal consumption in the electric power sector increases by almost 5% in 2010 [to 1,059 million short tons], but it remains below 1 billion short tons for the second consecutive year."

On the supply side, the EIA expects total U.S. marketed gas production to rise by 2.8%, or 59.72 Bcf/d, this year and fall by 3.8% to 57.46 Bcf in 2010. While working natural gas rigs have declined by more than 54% since cresting at 1,600 late in August 2008, marketed natural gas production in the Lower 48, nonfederal Gulf of Mexico has only declined by 0.6% between January and August. The gas rig count is on the rise again after bottoming out in mid-July of this year, the agency noted. Nonetheless EIA still expects that the reduced drilling rates and steeper decline rates from new wells brought on stream this year will lead to lower levels of production during 2010.

It expects pipeline imports from Canada to drop by 13% to 8.59 Bcf/d this year and by 7% to 7.96 Bcf/d in 2010 (see related story). The EIA sees imports of liquefied natural gas (LNG) rising to about 470 Bcf this year from 350 Bcf in 2008 and to about 660 Bcf in 2010. "Although winter weather in the Northern Hemisphere tends to increase global LNG demand and limit cargoes available for the United States, the recent start-up of new liquefaction projects in Qatar and Yemen may lead to higher U.S. import flow before the year is out" (see related story).

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