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Natural Gas Production Up, Inventories Below 2009 Levels

12/09/2010 01:47PM

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U.S. Natural Gas Consumption. This month's Outlook, for the firsttime, reflects recent changes in the Form EIA-857 monthly natural gassurvey methodology in the forecasts for residential and commercialnatural gas consumption (see Changes in Natural Gas Monthly Consumption Data Collection and the Short-Term Energy Outlook).The new survey methodology should not significantly change reportedtotal annual consumption volumes. However, EIA expects significantchanges in the seasonality of reported residential and commercial sectornatural gas consumption from historical reporting norms as the improvedreporting on the EIA-857 leads to more accurate monthly reports. Forexample, first quarter 2011 forecast residential plus commercialconsumption is 1.7 billion cubic feet per day (Bcf/d) lower in thisforecast compared with last month's Outlook, while fourth quarter 2011consumption is 3.8 Bcf/d higher.

U.S. Natural Gas Production andImports. Forecast marketed natural gas production increases by 3.5percent in 2010, up from 2.5 percent in last month's Outlook. Therevision is largely due to unexpectedly high production during the monthof September as reported in the EIA Natural Gas Monthly.Natural gas production in 2011 has also been revised upwards, but EIAstill predicts a total year-over-year decline of 0.1 percent in 2011.An expected 14.3-percent decline in GOM production is mostly offset by a1.4 percent increase in the lower 48 non-GOM production.

Theincrease in the natural-gas-directed drilling rig count since mid-2009,combined with a growing share of horizontal drilling rigs in thelower-48 States, contributed to natural gas production growth in 2010.The number of rigs drilling for natural gas reported by Baker HughesIncorporated increased from a low of 665 in July 2009 to 973 in April2010. Over the last 6 months the natural gas rig count has stayedrelatively unchanged, but in the last several weeks it has appeared toshow the beginning of an expected decline, ending November with 953rigs. EIA expects drilling activity to decline in 2011 because ofrelatively lower natural gas prices. The large price difference betweenpetroleum liquids and natural gas prices on an energy-equivalent basiscontributes to an expected shift towards drilling in shale formationsthat contain a higher proportion of liquids.

EIA expects grosspipeline imports of 8.4 Bcf/d in 2011, a decrease of 6.3 percentcompared with 2010 pipeline imports. This is a significant revision oflast month's forecast of a 1.4-percent increase. EIA expects thatCanadian gas will become less competitive as new U.S. pipelines andincreased lower-48 production with lower transport costs displaceimports. Projected liquefied natural gas (LNG) imports average 1.25Bcf/d in 2010, a 1.0-percent increase from 2009 levels. Imports in 2011fall to 1.21 Bcf/d, a decline of 2.9 percent. High domesticproduction, high inventories, and low U.S. prices relative to Europeanand Asian markets should continue to discourage LNG imports into NorthAmerica.

U.S. Natural Gas Inventories. On November 26, 2010,working natural gas in storage stood at 3,814 Bcf, slightly below lastyear's level at this time (U.S. Working Natural Gas in Storage Chart).At the end of the winter heating season (March 31, 2011), EIA expects1,833 Bcf of working natural gas will remain in storage, about 171 Bcfhigher than at the end of March 2010. The forecast higher inventory isprimarily the result of both the projected 3.1 Bcf/d increase in naturalgas production and 5 percent fewer heating degree-days over the next 4months compared with the year before.

U.S. Natural Gas Prices.The Henry Hub spot price averaged $3.71 per million Btu (MMBtu) duringNovember, an increase of about 28 cents from October's price of $3.43per MMBtu (Henry Hub Natural Gas Price Chart).Over the winter heating season, the projected monthly average spotprice peaks at $4.29 per MMBtu in January 2011, before dropping backdown to close to $4.00 per MMBtu in June 2011. This month's Outlookslightly raises the average 2011 Henry Hub spot price to $4.33 per MMBtufrom last month's forecast of $4.31 per MMBtu.

Uncertaintyover future natural gas prices is slightly lower this year compared withlast year at this time. Natural gas futures for February 2011 delivery(for the 5-day period ending December 2) averaged $4.29 per MMBtu, andthe average implied volatility over the same period was 45 percent.This produced lower and upper bounds for the 95-percent confidenceinterval for February 2011 contracts of $3.06 per MMBtu and $6.03 perMMBtu, respectively. At this time last year, the natural gas February2010 futures contract averaged $4.84 per MMBtu and implied volatilityaveraged 57 percent. The corresponding lower and upper limits of the95-percent confidence interval were $3.20 per MMBtu and $7.34 per MMBtu.