The US natural gas market is still recovering from Gulf of Mexico production losses caused by Hurricane Ivan in September, but above-normal temperatures in September and October and inventories at a 13-year peak are offsetting the effect, government and private forecasters say.
Storage at the start of the heating season has reached its highest level since 1991, the US Energy Information Administration reported Nov. 9. Working gas in storage, estimated at 3.505 tcf, is 6% higher than a year ago and 9% above the 5-year average, EIA said in its latest short-term energy outlook.
The loss of production in the gulf did drive gas prices up in October. But the Henry Hub spot gas price fell by $1.03/MMbtu during Nov. 2-9 to $5.85/MMbtu.
"Ivan was responsible for lost production of about 2 bcfd, which is consistent with about $1 in Henry Hub prices," said Dave Costello, who directs the compilation of EIA's short-term outlook each month. "There's still a significant risk for a natural gas price spike if it gets cold. If companies hadn't built storage to these levels, the risk would have been greater."
EIA's latest forecast is for the Henry Hub gas price to average $6.18/Mcf this year and $6.33/Mcf in 2005.
Prices, inventories
So far, however, prices are following their normal pattern, according to George S. Littell, a partner at Groppe, Long & Littell, oil and gas consultants in Houston.
"Forecasting natural gas can be difficult," he said. "One easy fact is that working gas in storage around Nov. 1 will be around 3 tcf, give or take a little bit. The other consistent pattern in all products that have demand seasons, including distillate fuels and gasoline, is that the prices are highest before the season starts. In previous years, when gas prices have plunged, it's been in February. Now that we're going into the heating season, the outlook over 60-100 days is that prices will start to decline."
Stephen Smith, president of Stephen Smith Energy Associates in Natchez, Miss., agreed that apprehension about winter gas supply tends to get magnified in early November. In 2003's final 4 months, instead of a major hurricane, there were rumors that a major arctic blast would arrive in mid-December, he recalled.
"The gas price, which had been dropping like a rock all fall, started to climb, peaking at $6.74 on Dec. 19," he said. "In January, when we actually had the coldest weather and wellheads froze in Canada, the average weekly price never got that high."
Smith expects high gas storage injection rates to become the norm.
"The old concepts of appropriate inventory levels have changed. In the past, when you went into winter, the idea of how much buffer stock you need was affected by some spare productive capacity. When you got some bitterly cold January weeks, you could pull harder from wells that hadn't been producing, which gave inventory draw some help," he said.
"Now, I think everyone realizes that when you get cold weather, there's a bigger heart-of-winter impact on gas draws. The bottom line is that the market has figured out that the old inventory norms aren't what they used to be, and it's all right to go into the heating season with extra storage."
EIA thinks higher gas inventories already have influenced markets.
"The fact that there was a strong effort to maintain injections at a higher level through September and parts of October had a lot to do with it," Costello said. "That tends to reduce some of the risk of extraordinary spikes during the winter. There's still risk because there's such a big market for natural gas in the United States. Ivan did remove 140 bcf from the US market. There's still some outage in the Gulf, about 700 MMcfd. Most of the analysis we've seen suggests that most, if not all, of that production should be back on line by the end of the month."
Production outlook
EIA's latest forecast calls for US gas production to grow by 1.6% in 2005. Other forecasters consider that assessment optimistic.
"I feel more comfortable with a forecast of flat production, or a half percent decline," said Smith, while Littell suggested that US gas production in 2005 will be down by about 2% from 2004.
Costello listed several reasons for EIA's assessment. One is that the federal energy forecasting group expects 2004 domestic gas production to show about a 1.2% decline from 2003's average. Production was down in the first half, and Hurricane Ivan's damage to production in the gulf aggravated the deficit.
"There probably will be a year-over-year bounce in the third and fourth quarters next year, assuming there's not a disruption comparable to Hurricane Ivan," said Costello. "We have reason to think some other improvement is likely. Not all of the benefits from increased drilling during 2004 have shown up yet, for example."
Littell expects production in the gulf to increase toward the end of next summer when Thunder Horse field in Mississippi Canyon and three others in Green Canyon start up.
"In the Rockies, it's a race between Colorado and Wyoming, where there have been some difficulties," he said. "In Oklahoma and Texas, it's starting to look as if the Barnett shale is starting to peak, and the East Texas play already has. It's getting to be a tough business."
Smith said: "The decline in gas production has been driven by the Gulf of Mexico shelf and some other legacy production areas, offset by other areas such as the deepwater gulf, some enormously successful unconventional plays such as the Barnett shale, coalbed methane, and basin-centered gas such as the Pinedale anticline. That's where a lot of money has been spent, and just about every major company has operations."
