With mother nature largely in control of the natural gas market, forecasting prices can be a real headache. Winter Henry Hub prices (November-March), for example, could average anywhere from $4 to $11.50, depending on whether temperatures are 13% warmer than normal or 12% colder than normal this winter, Energy and Environmental Analysis Inc. (EEA) said in its latest Monthly Gas Update. EEA’s best guess is an $8.48 winter average at the hub.
For the next storage injection season (April through October 2007), the price distribution at Henry based on the same temperature range is $4.00-12.00/MMBtu, and EEA’s base case prediction is $6.96. Similarly wide potential price ranges are seen for New York Citygate, Chicago and Southern California, EEA said.
“Weather is the single most important variable for gas prices in the short run,” EEA noted. “Weather drives heating load in the winter and power generation load in the summer. Adverse weather can disrupt gas supplies or knock out power load, while mild weather can create its own market uncertainty.”
The five-month winter price distributions are expected to be as follows: for eastern New York prices could be anywhere from $5.00 to $21.00/MMBtu, EEA said, with $10.25 being the base-case prediction; for Chicago the distribution is $4.50 to $11.50 with a base case of $8.69; and for Southern California the distribution is $4.00 to $9.50 with a base-case forecast of $7.67.
EEA also made the following predictions for the next seven-month injection season: eastern New York, $4.50-13.00 with a base case forecast of $7.59; Chicago, $4.00-12.00 with a base case forecast of $7.01; and Southern California, $4.00-12.00 with a base case of $6.82. EEA said it created its price distributions by running a model with actual weather from the last 73 years.
Barring significant hurricane activity affecting the Gulf of Mexico producing area for the rest of this hurricane season, EEA expects 2006 Henry Hub prices to average about $6.90 which would be $1.90 less than the 2005 Henry Hub price average of $8.80. The key factors leading to the lower prices this year have been the warmest January in 30 years, which led to a record working gas level in storage of 1.7 Tcf at the end of March, relatively strong storage injections this summer, returning production after repairs from last season’s hurricane damage (production should reach 52 Bcf/d by year’s end), and the absence of damaging hurricanes this season.
Despite the current bearish gas market scenario, EEA maintains that the underlying natural gas supply-demand balance is still “very tight.” First quarter gas demand in 2007 and 2008 is expected to rise about 10 Bcf/d over demand in the first quarter of this year when the weather was very mild. And despite the recent oil price decline, crude prices remain high at about $10/MMBtu. “Oil prices impact gas prices in two noticeable ways,” EEA said. “They affect the price at which gas-to-oil switching occurs in the power sector and they affect the price of LNG imports.”
EEA expects LNG imports and domestic production to increase in the coming years, “but not by enough to offset increases in demand resulting from assumed normal weather.” LNG imports are expected to reach 2.1 Bcf/d and 2.5 Bcf/d in 2007 and 2008, respectively, versus 1.8 Bcf/d in 2006. U.S. gas production is expected to increase to 53.1 Bcf/d in 2007 and to 54.4 Bcf/d in 2008, versus 51.6 Bcf/d in 2006.
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