The recent decline in the price of domestic natural gas came partially in sympathy with plummeting crude oil prices, “but also because of the increasing fall gas storage surplus, which has occurred despite extended [hurricane] Gustav/Ike gas shut-ins, extremely low liquefied natural gas (LNG) imports and colder-than-normal fall weather,” an energy analyst said in a review.
And the storage surplus is likely to keep a lid on Henry Hub prices well into the new year, Stephen Smith Energy Associates (SSEA) wrote in its monthly energy report.
“Weather surprises aside, we expect the pressure from this growing storage surplus to keep Henry Hub prices below $6/MMBtu for much or all of the year,” SSEA said. Henry Hub prices are likely to trade generally in the $5-6.50/MMBtu range for much of the 2009-2010 period, SSEA analysts said.
SSEA’s price forecast mirrored those of other energy analysts, including Raymond James & Associates, which recently cut its 2009 price forecasts to $5/Mcf from $6.75 (see Daily GPI, Dec. 24, 2008), and Barclays Capital analysts, who said weakness in the gas market will persist and prompt-month prices will average $6.36/MMBtu over the course of 2009 (see Daily GPI, Dec. 22, 2008).
The analysts said they consider storage norms since Hurricane Katrina struck the Gulf Coast in 2005 to be roughly 400 Bcf higher than the 1994-2003 norms.
“The current gas price level is looking more like the new ‘steady state’ until much lower rig counts restore supply/demand balance to the North American gas market,” according to SSEA. While OPEC production cuts will eventually break the oil price decline — and, by extension, the natural gas decline — “reduced gas production capacity, achieved via lower rig counts, will still have to be the main source of restoring gas market balance…We believe that the rig count will decline to at least 1,300-1,400 rig range before the North American gas market re-establishes supply/demand balance.”
A reduction in rigs has been under way: Baker Hughes drilling statistics for the second-to-last week of 2008 indicated that the U.S. gas rig count stood at 1,347 rigs, which was 105 less gas rigs in operation than for the week ending Dec. 28, 2007 (see related story).
Reduced economic activity is also likely to reduce global LNG demand and prices, and LNG imports to the United States — which declined sharply in the summer and fall of 2007 “and have been at extremely low levels since then” — are likely to increase throughout 2009, according to SSEA.
“This implies that the task of rebalancing supply and demand in the North American gas market is not entirely a question of waiting for lower rig counts to reduce North American gas production. The time required for rebalancing the North American gas market is likely to be extended by the potential importation of excess global LNG supplies,” the analysts said. “We expect to see over-supplied North American gas markets for all of 2009 and arguably much or all of 2010 as well.”
While some early Hurricane Rita/Katrina recovery and the ramp-up of 1 Bcf/d from Independence Hub helped account for a sharp ramping up of total domestic production since early 2006, the main steady-state driver of production growth has been strong multi-year growth from the Barnett Shale and other shale and unconventional resource plays, according to SSEA.
“We now estimate 5.8% growth in U.S. gas production for 2008, as compared with 4.3% growth in 2007…the estimated annual production rate for 2009 is 1.8%,” the analysts said. The 2009 production estimate reflects a mid-year production peak due to the anticipated decline in the gas rig count.
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