Barring a lot of hurricane activity in the Gulf of Mexico this year, it’s unlikely that natural gas prices will rise to the level of 2005 prices, Virginia-based Energy and Environmental Analysis Inc. (EEA) said Wednesday. EEA is forecasting average 2006 Henry Hub prices at around $6.90/MMBtu, or $1.90 lower than the $8.80 average in 2005, with a “significant” rise due in 2007 and 2008.
According to EEA, the reasons for the lower gas prices this year are clear. Current gas storage inventories remain at record levels, U.S. gas production is expected to return to what it was before Hurricanes Katrina and Rita before the end of the year, and the hurricane outlook is “more normal.”
Going forward, the overall gas supply/demand balance “remains very tight. Assuming normal weather, natural gas prices should rise significantly over 2006 levels. We expect both 2007 and 2008 Henry Hub prices to average in excess of $8/MMBtu,” EEA said.
What will drive the higher prices in the next two years are several factors. Among them: storage levels are expected to return to historical averages. Assuming normal weather, heating season-ending storage levels for both 2007 and 2008 are projected to range between 1.3-1.2 Tcf, “or more than 400 Bcf below levels that occurred in March 2006.”
High oil prices also will limit fuel switching, according to EEA. Residual oil is now trading at $8/MMBtu, it said. “Natural gas prices must rise above that level before any significant switching from gas to oil begins.”
The power sector’s growth will drive prices up as well. With normal weather, average annual gas use in 2007 is expected to be at the 2006 level of 14.9 Bcf/d, said EEA. Power sector gas use in 2008 will be around 16.2 Bcf/d “as incremental growth in electricity sales is mostly met with additional gas-fired generation.”
EEA also expects to see “modest” increases in liquefied natural gas (LNG) supply, with imports at 2.1 Bcf/d in 2007 and 2.3 Bcf/d in 2008, versus 1.7 Bcf/d this year. “The 1.5 Bcf/d Cameron LNG import terminal in Louisiana begins operation in late 2008. The 1 Bcf/d Costa Azul terminal in Baja [California] Mexico is projected to begin operations in mid-2008.”
Finally, EEA is forecasting only modest growth in domestic gas production. “Driven by the increased level of drilling activity, U.S. natural gas production is expected to increase to 53.2 Bcf/d in 2007 and to 54.5 Bcf/d in 2008, versus a level of 51.6 Bcf/d in 2006. Over half of the 2007 increase is due to hurricane-related outages coming back on-line.”
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