High domestic production, mild weather and the absence of significant hurricane activity in the Gulf of Mexico have contributed to the decline in Henry Hub spot natural gas prices, as well as a large inventory build, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for November.
In October Henry Hub prices fell 43 cents/MMBtu from the average spot price of $3.88/MMBtu in September. Henry Hub prices are expected to rise to $4.22/MMBtu in January because of the increase in winter space heating demand, the agency said in the outlook, which was released Tuesday.
For all of 2010 the EIA sees spot prices averaging $4.35/MMBtu, a 40 cents/MMBtu increase over the 2009 average but down 12 cents/MMBtu from the forecast in last month's outlook. It said it has lowered the average 2011 Henry Hub price forecast from last month's outlook by 27 cents/MMBtu to $4.31/MMBtu, based on upward revisions in domestic production and inventory forecasts.
The EIA said it sees marketed natural gas production increasing to 61.49 Bcf/d this year from 59.98 Bcf in 2009, but it expects it to drop to 60.77 Bcf/d in 2011. "The drop in 2011 is a result of a 13.5% production decline in the GOM production [to 6.24 Bcf/d], which is only partially offset by a small increase in Lower 48 production [to 54.24 Bcf/d this year from 52.23 Bcf/d in 2009]. The relatively greater decline in GOM production in 2011 is due to an estimated 90 Bcf less production because of the 2010 drilling moratorium and the projected increase in hurricane-induced production outages of about 30 Bcf in the GOM next year compared with a relatively calm season this year," the agency said.
"The increase in the natural gas-directed drilling rig count since mid-2009, comprised of a growing share of horizontal drilling rigs in the Lower 48 states, contributed to natural gas production growth in 2010. The number of rigs drilling for natural gas reported by Baker Hughes increased from a low of 665 in July 2009 to 973 in April. Over the last six months the natural gas rig count has stayed relatively unchanged, ending October with 969 active rigs, the agency said.
It expects a modest decline in drilling activity next year because of relatively lower natural gas prices. The large difference between petroleum liquids and natural gas prices on an energy-equivalent basis contributes to an expected shift toward drilling in shale formations that contain a higher proportion of liquids, according to the EIA.
At the end of October working gas in storage stood at 3,821 Bcf, which exceeded the 3,784 Bcf level a year ago. Storage injections continued throughout November last year, with working gas reaching a record-high of 3,837 Bcf on Nov. 27, 2009. This year, however, the EIA said it expects a net 3 Bcf withdrawal during November, which is forecast to be colder than last November.
At the end of the winter heating season (close of March 2011), it expects 1,776 Bcf of working gas to be in storage, about 114 Bcf more than at the end of March 2010.
Fueled largely by greater gas demand by the industrial and power generation sectors, EIA projects that natural gas consumption will grow by 4.3% to 65 Bcf/d this year from 62.30 Bcf/d, and then rise slightly in 2011 to 65.4 Bcf/d. "Hot weather in the summer and low natural gas prices drove increased use of natural gas for electric power generation in 2010," but demand is expected to fall slightly in 2011, even as gas prices drop, EIA said.
The EIA sees gross pipeline imports of 9.1 Bcf/d in 2011, an increase of 1.4% compared with 2010 imports. And liquefied natural gas (LNG) imports are expected to average 1.27 Bcf/d this year, a 2.3% increase from 2009 levels, the agency said. "High domestic production and low U.S. prices relative to European and Asian markets have discouraged LNG imports into North America. However, LNG imports grow slightly in 2011 to 1.32 Bcf/d, a 5% increase from 2010 levels."
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