OUTLOOK '12: US natural gas supply keeps Henry Hub price down

04 January 2012 20:23  [Source: ICIS news]

HOUSTON (ICIS)--The so-called shoulder months, when inventories typically build up before peak demand periods, extended well past market expectations during the autumn of 2011, setting up the possibility for a hefty carryover of storage by the spring of 2012. 

This means falling prices, particularly as the US natural gas futures price has tumbled nearly 12% from mid-October to mid-December.  

This triggered a scrambling of sorts by analysts trying to get a late-year adjustment to their outlooks for NYMEX Henry Hub natural gas futures prices in 2012.  

The US Energy Information Administration’s (EIA) last projection of the year for the average 2012 Henry Hub spot price was $3.70/MMBtu, a large 10% revision from the previous month’s estimate, according to the EIA’s short-term energy outlook released on 6 December.  

“Strength in domestic production and abundant storage supplies have led to relatively low prices this year and EIA expects supply growth to continue,” the government agency said in its monthly report.

Lower revisions have come from analysts at investment bank UBS, which cast the 2012 average at $4.50/MMBtu. At the same time, Deutsche Bank pinned its 2012 average at $4.25/MMbtu, revised lower from $5.00/MMBtu.

In a recent Deutsche Bank report, analysts noted that prices will likely stay moderate because end-of-winter inventories are more than adequate.

“This will tend to stifle rallies, even if La Nina conditions lead to colder December-January temperatures,” the report said.

As of 12 December, the NYMEX 2012 calendar average was $3.48/MMBtu, the lowest reached all year.

Houston-based energy consulting firm Gelber and Associates estimated its average at $3.98/MMBtu, revised lower from $4.37/MMBtu in mid-October.

Gelber analyst Pax Saunders said despite the published averages for 2012, something unexpected besides supply-demand fundamentals could always hit the market.

“There’s always something,” Saunders said. “There’s a lot of chance for volatility. Traders like to trade.”

US shale gas production remained strong this year with the country’s output reaching 72bn cubic feet/day (bcf/day) in the lower 48 states as of 29 November, according to the EIA’s monthly production report.

But as the amount of natural gas in the country has increased, demand stalwarts such as winter temperatures have been unexpectedly mild heading into the last two months of the year, keeping heating-related demand lacklustre.

In addition, the staggering US economy has reduced its need for energy as demand remains hollow. 

US natural gas stockpiles have reached record-high levels at 3,852 bcf in mid-November, according to EIA estimates.

The EIA estimated that working natural gas stockpiles will be 1.8 trillion cubic feet (Tcf) at the end of March 2012. This represents a projected withdrawal of 2.0 tcf for the heating season, compared with a withdrawal of 2.3 tcf last season.

US drilling activity has diminished slightly in recent weeks, as US gas-directed rigs fell by 4% week on week during the week ended 9 December, from 856 rigs to 820 rigs, according to the Baker Hughes North America Rotary Rig Count. 

But some analysts have noted a detachment with the rig count and gas prices.

“The market seemed to have largely ignored this event as the gas rig count is not well correlated with short-term price actions,” Barclays Capital wrote in a recent report. “Moreover, we believe that activities such as pad drilling and other rig efficiency gains indicate that at the current rig count level, production will continue to grow at a healthy pace.”

And the uptrend in gas drilling is not expected to taper, said energy economist Michelle Foss with the University of Texas at Austin, who expects gas production will continue from associated gas, the gas produced in association with crude oil wells. Associated gas typically has a higher natural gas liquids output, commonly used as a feedstock for the petrochemical industry.

According to Barclays Capital, a sample group of companies studied by the analysts derived less than 50% of its revenue from liquids drilling at the beginning of the shale gas boom. That same group of companies is expected to gain 64% of its revenues from liquids in 2012.

The front month NYMEX natural gas price this year reached a five-month low, with prices as low as $3.25/MMBtu in mid-December, and production will still come to the market even though dry gas wells are not being drilled.

“Right now, there are very, very few [dry] gas drilling deals that make sense,” Foss said.

But a bright spot for natural gas demand could come in the form of US Environmental Protection Agency (EPA) regulation on coal emissions, although the potential is unclear.

The EPA’s Cross-State Air Pollution Rule, which requires 27 states to improve air quality by reducing power plant emissions, should start this year.

This will likely boost demand for natural gas by plants that can switch from coal to gas or diminish the number of coal-generated plants in operation.

“The requirement to install pollution control equipment could result in a number of large power plants being taken off line for a significant period of time,” the EIA said. “Yet the exact level and timing of retrofit outages, or possible retirements, remain unknown.”

By: Ruth Liao
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