The potential for a late summer natural gas price collapse may not be as high as some analysts had predicted a few months ago, thanks to hotter-than-expected weather and a moderation in gas supply going forward, energy analysts predicted Monday.
However, U.S. gas supplies now sit "comfortably above the peak levels achieved prior to the massive rollover in the rig count in late 2008/early 2009," and the largest publicly traded independents still are projecting gas supply to be up "a whopping 7%" year/year (y/y) in 2010, said analysts with Raymond James & Associates Inc.
"Despite the fact that U.S. gas supply has grown much faster than market expectations, gas demand has grown even faster," said analysts J. Marshall Adkins, John Freeman, Collin Gerry and Cory Garcia. "On the demand side, industrial gas demand has rebounded strongly this summer but the biggest surprise has been the spike in weather-related gas demand."
According to the National Oceanic and Atmospheric Administration, weather-related gas demand this summer is up by an estimated 200-350 Bcf over normal adjusted weather demand. "Clearly, the intensity of the hotter-than-normal weather this summer has been the primary reason U.S. natural gas prices have not fallen below $4.00/Mcf this summer," said the trio.
In addition, domestic gas supply growth appears to be slowing, even though the gas rig count is up by about 50% since it bottomed in July 2009 and even though there's been a shift to activity in more prolific horizontal plays.
Several things may be leading to a slowdown in domestic gas growth, the Raymond James analysts said. Lower gas production from the Gulf of Mexico because of the drilling moratorium, bottlenecks in pipeline takeaway capacity, constraints with hydraulic fracturing crews, delays in gas processing plants, a reduced benefit from the early 2010 de-bottlenecking of gas supplies that had been shut in last fall, and the high decline rate from horizontal shale wells all are moderating the growth numbers.
In Raymond James' 2010 survey of reported gas production from publicly traded U.S. producers, which comprises about half of total U.S. gas output, the numbers appeared to confirm the Energy Information Administration (EIA) Form-914 data. In late June EIA reported that U.S. gas output across the Lower 48 states in April nearly matched production in March, and was 2.6% higher than in April 2009 (see Daily GPI, June 30). The Raymond James survey of production from April through June showed that gas supplies increased y/y by 3.7% (or 1.1 Bcf/d).
If not for one of the warmest summers in recent history, "we remain convinced that we'd be looking at gas prices well below $4.00/Mcf," said the Raymond James trio. "That said, recent production trends have even us, the popularly coined 'perma-bears,' a little nervous..." As to what this may mean for 2011 production, "the short answer is, we don't know."
Stephen Smith Energy Associates estimated in a separate report on Monday that Lower 48 onshore gas production rose 2.5 Bcf/d from December through May. Gas rigs also are up almost 5% since the end of May.
"Before any adjustments for potential hurricane and/or storage congestion effects, our projection would reach 4,095 Bcf at its November peak, which is well over last year's 3,849 peak...," said Smith. "Assuming 160 Bcf of production losses because of hurricanes and/or storage congestion, this projection would be reduced to 3,872 Bcf on Oct. 29 -- about 85 Bcf above the late October storage level for last year."
Historically, noted Smith, the most important driver of domestic onshore gas output capacity has been the gas rig count, but this effect now is being diluted by the "increased impact of widespread use of hydraulic fracturing." The Baker Hughes gas rig count jumped by nine rigs to 992 rigs for the week ending last Friday.
Despite all of the reasons that gas supplies may be tightening, said the Raymond James team, "the flattening of the natural gas futures curve since early May -- with 2012 contracts falling by 50 cents/Mcf and 2015 contracts by a whopping $1.00/Mcf over that period -- sends a clear pricing signal that the market believes low gas prices and easy gas production growth are here to stay. We agree."
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