After yesterday’s post on the wide range projection for oil next year, I wanted to share some thoughts on natural gas in 2009. I’ll start with the supply side, which has been more volatile than oil. Then I’ll go over some potential trends in demand.
The weekly EIA natural gas storage report came out today. And while last week’s inventory drop was 40% above average due to some cold weather, levels remain above the five-year average and allow the price of natural gas to remain below $6 per MMBtu at year’s end for the first time since 2002. Inventories are 2.3% below last year’s level, but US natural gas companies have ample production capacity that they can ramp up from shale formations if the prices rise above $7 (which is seen as a floor to make most new shale production profitable). Recent reserves growth paint a healthy supply picture for the North American natural gas market through 2009 at least.
Internationally, there may be some tightness in natural gas markets — especially if Russia and other producers decide to flex their energy muscles (as it appears ready to do regarding Ukraine tomorrow). The year 2009 may mark the emergence of natural gas production coordination by Russia, Qatar, and Iran in a natural gas major exporters cartel a la OPEC.
On the demand side, it is difficult to say in the volatile economic environment. The EIA predicts flat US demand that would probably prevent prices from approaching the $10+ per MMBtu that natural gas hit last summer. But I would give natural gas a large range for its price (similar to oil) of ~$3.50-$9 per MMBtu [revised floor from $5 to $3.50 on February 19th on low industrial production numbers], with weather-related spikes in specific regions possible. If industrial production falls even further below the current grim projections, natural gas prices could slip even lower.
Today’s EIA oil report showed petroleum demand creeping up toward last year’s level, as gasoline demand was down only 1.9%, distillates down only .7%, and propane down 9.5%. Inventories are at comfortable levels across the board, though we’ll see if the New Year’s cold snap will bring inventories down below average for some refined products.
Bottom line: Natural gas prices are probably near their bottom as producers curtail new projects on the low prices. It would be hard to lift natural gas prices much beyond cost of marginal production ~$7-$8 per MMBtu unless the emerging “natural gas OPEC” gets aggressive in the coming year. As with oil, the more efficiency we can deploy in our residential and industrial use – the more we can keep enjoying these low prices and the climate benefits of lower greenhouse gas emissions.
Onwards & Happy New Year-
Dennis
Tags: 2009, demand, Natural Gas, Oil, supply