INSIGHT: 2010 natgas prices directed by 2009 factors

31 December 2009 15:00  [Source: ICIS news]

By Ryan Hickman

HOUSTON (ICIS news)--As the days and weeks of 2009 passed, energy commodities were on a slow and upward climb from the early-year trough, but as crude oil started to make its run to $80/bbl, natural gas futures fizzled out and stabilised waiting for hurricanes, blizzards and an industrial comeback.

As expiration of the 2009 calendar neared, pricing predictions from industry analysts rolled in and the same factors that suppressed natural gas values this year were headlining forecasts of steady pricing in 2010.

Putting aside the weirdness of weather on natural gas demand - hurricanes staying away from US coastlines coupled with a cool summer and mild winter in '09 - pricing prognosticators were honing in on rig counts, coal use, liquefied natural gas (LNG) imports and storage levels as the indicators for 2010 prices.

In the latest tally of natural gas rigs from oil field services firm Baker Hughes, operating rigs in the US are down 43% from the same time last year at 773 units.

The decline in rigs would usually translate into less production, but fracturing technology in the extraction of gas from tight-rock shale fields in the US has kept output steady, according to Bob Ineson, head of the North American gas group at IHS Global Insight’s Cambridge Energy Research Associates (CERA).

“What the technological progress has done has made the volumes from the wells that much larger," he said. "Even with steep decline curves you can still maintain production levels with a much lower rig count than the peak we had last year.”

Output continued in 2009 while demand dried up from idled factories and unseasonable weather. US stockpiles built by the week and by November, when deliveries typically start to outweigh injections, domestic storage was at all-time high levels.

Ineson sees natural gas production backing off and providing some support for higher prices, but not dramatically above current futures.

"We are not in the camp that says we are going to be at six to seven dollars by the end of 2010,” he said.

Teri Viswanath, director of energy research at investment bank Credit Suisse , has predicted 2010 natural gas prices will dip below the $5/MMBtu mark for the year.

She is pegging the average 2010 futures contract around $4.60/MMBtu and agrees that shale gas production will curtail, but imports of LNG will make up for the production loss.

“For every molecule we lose in domestic production, we’ll make up in imports,” she said. "A stable outlook in supply coupled with weaker demand will lead to a relatively low price environment."

On the LNG front, Viswanath said conservative forecasts put the 2010 increase in global LNG supply by 4bn cubic feet (bcf)/day. Half of that will head for the US, she said.

That outlook would double US LNG imports from roughly 1.0m bcf/day in 2009 to 2.0m bcf/day next year. The Energy Information Administration (EIA)'s is more conservative, predicting imports would rise to 1.7 bcf/day in 2010 while other forecasts have the total number at 4.0-5.0 bcf/day.

In addition, a surge in coal use is expected next year, thieving natural gas demand and placing downward pressure on natural gas pricing, Viswanath predicted.

"EIA projects 3% growth in 2010 for coal consumption in the retail and general industry sectors, following a 17% decline in 2009," the government agency wrote in its short-term energy outlook in early December. "Projected increases in electricity demand and higher natural gas prices will contribute to growth in coal-fired generation in 2010."

Viswanath's sub-$5 prediction is on the low end of the spectrum compared with other outlooks.

US investment banking giant Goldman Sachs sees natural gas futures on the NYMEX averaging $6.00/MMBtu next year and consulting firm Tradition Energy has centred its prediction on a $5.25/MMBtu average in 2010.

And the NYMEX futures contango has price next US winter in the low-$6.00s/MMBtu and flirting with $7.00/MMBtu into 2011.

However, everyone agrees that the major catalyst to start upward pricing momentum is the health of the industrial sector, including petrochemical producers, that use massive amounts of natural gas as a power fuel.

The relatively low price projections - futures were more than $13/MMBtu in July 2008 - come even at a time when natural gas' profile in the US energy landscape has started to expand.

The story of the shale gas revolution has begun to disseminate as a group of independent natural gas producer under the umbrella of America's Natural Gas Alliance have been blanketing media outlets with ads touting the fuel's place in the country's clean energy future, a priority of the Obama administration.

The influential US environmental group Sierra Club has promoted the increased use of natural gas. And US-based energy supermajor ExxonMobil also put its tacit support behind the fuel with a recent $41bn (€29bn) acquisition of independent natural gas producer XTO Energy, which has large leases in key US shale fields.

But much like prospects of natural gas prices back above $10, the fuel's dominance in the energy domain is still a long-term bet.

($1 = €0.70)

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By: Ryan Hickman
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