Tuesday, September 15, 2009

EIA Energy Outlook: Prices and Usage

I was cheered by today’s 13.5% increase in the Henry Hub natural gas spot price to $3.20. I’m assuming this price increase has something to do with a good economic trajectory for the nation.

My enthusiasm was short lived as I recalled the Energy Information Administration’s Short-Term Energy Outlook, which came out last week. The EIA expects the Henry Hub spot price of natural gas to average $2.32 in October and rise somewhat towards the end of the year. This depressed price projection is due directly to gas in storage, which the EIA expects to reach a record of 3.84 Tcf by the end of October (it is at 3.4 Tcf today). The Henry Hub spot price expectation for 2010 is $4.78, which is disappointing. Of course, it’s just a prediction, not a crystal ball reading.

On the supply side, the EIA expects LNG imports to increase in 2009 by 110 Bcf to 460 Bcf. The LNG import figure is expected to increase by 200 Bcf in 2010 to 660 Bcf.

The consumption numbers for the first half of the year were pretty ugly, but they show signs of improving in the second half. As the chart below shows, the EIA expects natural gas consumption in 2009 to be down 2.4% compared to 2008 and flat in 2010 compared to 2009.

Industrial gas consumption was down 12% in the first half of 2009 compared to the same period in 2008. The downward trend will continue in the second half but not be as bad and it’s expected to be flat in 2010. In the second half of the year, gas use in electric generating should show growth of 4.3%. The EIA also expects this figure to flatten out in 2010 as an increase in gas prices and the addition of 10 gigawatts of new coal-fired generating capacity in the next year will help coal regain some of the baseload generation share from gas.

I believe electricity generation is natural gas’s greatest growth opportunity. As the chart below shows, the EIA expects electricity consumption to be down 3.3% in 2009 compared to 2009 and up only 1.2% in 2010 over 2009.

While these numbers don’t scream growth, the most important issue is the fuel mix. Taking a few percentage points of market share from coal in 2009 has helped gas prices from sinking to even lower lows. This trend might not continue in 2010 with new additional coal-fired generation coming online, but if electric power generators have to start paying for at least some of the carbon and other pollutants they emit, they will realize quickly that burning gas will be one hell of a lot cheaper than burning coal.

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