Tuesday, November 10, 2009

EIA Short-Term Forecast: Not Very Sunny for Gas

The Energy Information Administration released its Short Term Energy Outlook today.  The report forecasts that the average Henry Hub spot price for natural gas in the month of November will be $4.22/Mcf (about $4.10/MMBtu) and $5.01/Mcf ($4.87/MMBtu) in 2010. The EIA suggests the spot price run-up in October was due to cooler than usual weather in the Midwest causing lower than normal storage injections last month. But the EIA doesn't see much opportunity for gas spot prices rise much beyond current prices through the end of the year.

The forecast for next year is not very sunny, in contrast to the feelings of major producers like Chesapeake, which see the gas market evening out and prices growing towards the $7/MMBtu range in 2010-11. Given the high level of storage at the end of this injection season, storage levels at the end of winter should be extremely high unless there is an extremely cold winter.  A high level of storage should keep a lid on gas prices next year.

Next year, the EIA sees growth for natural gas in the residential, commercial and industrial sectors but a decline in use in the electric power sector as 4,300 MW of new coal-fired power plants come online in 2010. Natural gas gained market share from coal over the summer of 2009 when the natgas price was extremely low, but with the uptick in prices since the end of August, natgas consumption in the electric generation sector has returned to normal levels. The EIA also sees an increase in LNG imports as large liquefaction facilities in Qatar and Yemen come online. EIA expects LNG imports to rise from 350 Bcf in 2008 to 470 Bcf in 2009 and 660 Bcf in 2010, continuing to pressure domestic supply levels.

The EIA doesn't have a crystal ball to predict the future, but it does have a mountain of data from all sectors of the energy market.  But, quoting the warning on all financial products, "past performance is not indicative of future results." Who will be right? Are major gas producers engaging in wishful thinking?  Is the EIA wearing blinders? We'll see...

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