| The outlook for natural gas remains negative as the | | | | in storage. Working gas in storage was 3,837 Bcf as |
| supply of the fuel outstrips demand. This situation will | | | | of Friday, November 27, 2009, according to EIA |
| remain in place throughout the 2009-2010 heating | | | | estimates. This represents a net increase of 2 Bcf |
| season, unless the U.S. experiences an extremely cold | | | | from the previous week. Stocks were 470 Bcf higher |
| winter. The earliest this situation will change will be | | | | than last year at this time and 487 Bcf above the |
| during the 2010 - 2011 heating season, when available | | | | 5-year average of 3,350 Bcf. In the East Region, |
| supply might be lower. Until then investors should | | | | stocks were 168 Bcf above the 5-year average |
| tread carefully when considering the natural gas | | | | following net withdrawals of 7 Bcf. Stocks in the |
| market. | | | | Producing Region were 243 Bcf above the 5-year |
| Natural Gas Demand | | | | average of 976 Bcf after a net injection of 8 Bcf. |
| According to the Energy Information Agency (EIA) | | | | Stocks in the West Region were 76 Bcf above the |
| the natural gas outlook predicts decline in total natural | | | | 5-year average after a net addition of 1 Bcf. At |
| gas consumption to decline by 1.3 percent in 2009 | | | | 3,837 Bcf, total working gas is above the 5-year |
| followed by an increase by 0.6 percent in 2010 (Total | | | | historical range. |
| U.S. Natural Gas Consumption Growth). Growth due | | | | As shown in the chart from the EIA, Working Gas in |
| to weather related use in the residential and | | | | Underground Storage Compared with 5-Year Range |
| commercial sectors in 2009 cannot overcome the | | | | was well above the range. |
| current economic weakness in the industrial and | | | | |
| electric power sectors. Consumption in the industrial | | | | Producers, due to voluntary shut-ins, completion |
| and electric power sectors is expected to decline by | | | | delays, and pipeline/gathering constraints, have been |
| 5.1 and 1.0 percent, respectively, in | | | | reducing supply for several months. Since storage |
| 2009. Consumption growth in 2010 remains largely | | | | capacity is at an all time high, recent injections have |
| dependent upon the timing and pace of economic | | | | been low. With gas prices around the $5.00 area, we |
| recovery. Based on current assumptions, 2.2-percent | | | | should expect production to pick up as withdrawal |
| growth in the electric power sector combined with | | | | rates increase. It is difficult to determine how much |
| slight growth in the residential and industrial sectors | | | | production will return, though it will tend to offset the |
| are all expected to contribute to 2010 consumption | | | | withdrawal rates. |
| growth. | | | | Prices |
| Included in the natural gas outlook, prices could | | | | Price decreases leading up to Thanksgiving reflected |
| remain low over the next few years as new | | | | the usual decrease in demand that generally occurs |
| coal-fired electricity plants open, reducing the overall | | | | during a holiday week. A decrease in industrial |
| amount of the natural gas used to generate power. | | | | demand and milder-than-normal temperatures in some |
| According to Jen Snyder of Wood Mackenzie, when | | | | areas of the country also drove price down. |
| these new plants come online, demand for natural | | | | According to Bentek Energy, LLC, total U.S. demand |
| gas could rise sharply as older coal-fired plants are | | | | dipped during the Thanksgiving holiday and demand in |
| retired and government policies show a greater | | | | all regions was lower than the week prior. Demand |
| preference for cleaner energy sources. | | | | for natural gas has been slow to recover, although |
| In her view, prices could even spike to $10 per million | | | | the onset of colder weather will encourage |
| British Thermal Units in the 2013-2014 timeframe, as | | | | space-heating demand, according to Bentek. The |
| producers are unable to keep up, before falling back | | | | Henry Hub spot price is expected to average $5.01 |
| to the $6.50 range after that period. | | | | per Mcf in 2009 and $5.93 per Mcf in 2010. |
| Winter weather is the leading factor in natural gas | | | | Contributing to the natural gas outlook, the price |
| demand. Cold winters lead to use of more gas. | | | | disparity between natural gas and oil has widened, |
| Warmer winters reduce demand. | | | | leading some to believe that there is a natural |
| For example, the Oceanographic and Atmospheric | | | | upward pressure on natural gas. Part of the reason oil |
| Administration (NOAA) reported that there were 130 | | | | is experiencing higher prices is from the growing |
| TDDs, or Total Degree Days (2 of which were | | | | demand from emerging economies. While North |
| CDDs, or Cooling Degree Days) during the week | | | | America has an overabundance of natural gas, it is |
| ending November 28. This was 19% below normal | | | | difficult and costly to export. Therefore, the market |
| levels and 29% below last year. This warmer | | | | for gas remains within the continent. The relative |
| weather caused the use of natural gas to be much | | | | price of natural gas to oil is changing as the dynamics |
| lower than in past years. | | | | of demand for oil are changing. We should not |
| Colder weather in December will drive up demand. | | | | depend on the relationship to drive the price of gas in |
| What is important to follow is how long the cold | | | | the future. Substituting natural gas for oil requires |
| weather will last and whether the temperatures are | | | | substantial capital investment. Following government |
| average, below average or above average. | | | | policy, the focus is to bypass natural gas as a fuel |
| Using NOAA weather factors and EIA historical | | | | for transportation and go directly to electricity. The |
| withdrawal rates, Raymond James developed the | | | | T. Boone Pickens plan to use natural gas, as an |
| natural gas outlook tables below showing expected | | | | interim fuel while the infrastructure to use electricity |
| withdrawal rates. If this forecast turns out to be | | | | is deployed is not working out as he expected. |
| correct, the U.S. will end up with substantially more | | | | Shorter term, the following is a possible scenario for |
| gas still in storage than in prior periods. Should the | | | | natural gas outlook over the next year or two. The |
| winter of 2009 – 2010 be colder than expected, | | | | large increase in proved reserves has come from |
| the withdrawal rates will raise accordingly. The | | | | shale gas using hydraulic fracturing and horizontal |
| forecast for 2009-2010 withdrawals of natural gas is | | | | drilling. Natural gas produced from shale can lose as |
| substantially lower than average. Keep in mind that | | | | much as 50% of its production rate in one year. To |
| many producers have curtailed or shut down their | | | | maintain the same level of production natural gas |
| production as places to store gas were not available. | | | | producers must drill more wells than other formations. |
| This production can come online helping to offset | | | | With the high levels of storage, producers have |
| some of the withdrawal rates. | | | | curtailed their drilling programs. As a result, they will |
| | | | experience lower production within the next year. |
| Natural Gas Supply | | | | This means production will taper off in the spring to |
| According to the EIA, with so much gas in storage | | | | summer of 2010. If companies do not pick up their |
| the outlook for natural gas annual production in 2010 | | | | drilling in the middle of 2010, available supply will not |
| is expected to decline relative to 2009 in the Federal | | | | come online to recharge storage. this could lead to an |
| Gulf of Mexico and Lower-48 non-Gulf of Mexico by | | | | increase in prices as supply fails to reach prior levels, |
| 6.3 and 0.6 percent, respectively. | | | | meaning the earliest natural gas prices can make a |
| For the week ending November 28, 2009, the EIA | | | | comeback is late 2010. |
| reported that natural gas in U.S. storage facilities | | | | Until then the price of natural gas will remain under |
| increased by 2 Bcf. Working gas in storage now | | | | pressure as supply exceeds demand. Therefore, |
| totals 3,837 Bcf versus 3,367 Bcf in storage last year. | | | | investing in the natural gas ETF (UNG) will not prove |
| The y/y storage surplus of 404 Bcf increased by 66 | | | | viable until next summer at the earliest as investors |
| Bcf to 470 Bcf. | | | | begin to realize that the supply will not reach 2009 |
| The EIA publishes a weekly report of the natural gas | | | | levels. |