Wednesday, September 8, 2010

EIA Adjusts Natural Gas Price Projections Downward

The EIA released its monthly "Short Term Energy Outlook" report today and the projections reflected some downward adjustments.  The EIA adjusted its projection of U.S. gross domestic product from 3.1% in 2010 to 2.8%.  In 2011, the GDP projection was lowered from 2.7% to 2.3%.  Not coincidentally, the EIA estimated price for Henry Hub natural gas spot prices were lowered to $4.54/MMBtu for 2010 and $4.76/MMBtu for 2011 (down from $4.98/MMBtu).  By my calculation, through yesterday the HH spot price has averaged $4.63/MMBtu YTD in 2010. For gas fans, the EIA projections shown on the chart below is not pretty.

The good news is that consumption has been growing.  The bad news is that consumption has been artificially supported by an extremely hot summer (23% more cooling degree days) and low gas commodity prices (leading to a switch by power producers from coal to gas).  While overall consumption will go up this year, it is plateauing in 2011.  With production expected to increase and storage close to the maximum levels, something will have to give, and it likely will be prices.

In terms of gas in storage, the EIA expects storage to peak at 3,687 at the end of the injection season, which is about 3% lower than last year's record number.  Currently, storage is running around 6% lower than last year's  level, so the EIA doesn't expect the relatively low storage injections that have characterized the past three months to continue into the fall. As the chart below shows, going forward the EIA expects storage to continue to run on the high side.

It is important to keep in mind that the EIA estimates are economic forecasts and not crystal ball readings, but the prevailing feeling among economists lately has been that economic growth will not be as robust as previously expected.  While we are in a recovery, it is not a sexy, high growth recovery.  Certainly not the end of the world, but for gas prices to climb out of the basement, we will need to see sustained, stronger economic growth.  While one can argue about the impact of government spending on the recovery, to me the good news is that slow growth is more reflective of better fiscal habits.  It means a longer and more painful recovery, but it could also mean a more sustainable economy for the long term, and that's good for everyone.

[UPDATE: Interestingly, analysts at Stanford C. Bernstein lowered their gas price estimates today too.  Bernstein was/is considerably more optimistic than EIA.  Bernstein's 2010 estimate will drop from $7/Mcf  to $4.75/Mcf (note: not /MMBtu, but it's a close measure, as one thousand cubic feet is just slightly less than one million Btu).  Given the actual prices through nearly three quarters of 2010, it looks like Bernstein is a little late to make this declaration.  In 2011, Bernstein's estimate drops from $8.50/Mcf to $6.50/Mcf, and in 2012 the estimate drops from $9.18/Mcf to $8/Mcf.]

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