The average price of U.S. natural gas in 2012 should hit its lowest level in 13 years as mild winter weather slashes demand and record production weighs heavily on the market for most of the year, a Reuters poll found.
With January, traditionally the coldest month of winter, now over and no Arctic air on the horizon, analysts cut their price estimates on forecasts that inventories will leave winter at or near all-time highs, cushioning the market for the rest of the year.
Even plans announced by some producers over the past week, after prices hit a 10-year low, to shut in output due to poor margins will not be enough to lend the market significant support.
The quarterly poll put the consensus forecast for the average spot price this year at Henry Hub, the benchmark U.S. supply point in Louisiana, at $3.30 (U.S.) per million British thermal units, down 27 per cent from last quarter's estimate of $4.50 and 18 per cent below the $4.02 average in 2011.
If realized, it would be the lowest Henry Hub mean since 1999 when the Hub averaged $2.27, according to Reuters data.
Natural gas futures prices on the New York Mercantile Exchange hit a 10-year low of $2.23 early last week, then bounced to the $2.70 area after several producers said they planned to cut back dry gas drilling operations or shut in some output.
While low prices should squeeze producer margins and force some to slow output, analysts noted that higher-value oil and gas liquids wells still produce plenty of associated gas that ends up in the market after processing.
"It's going to take a really low price to get dry gas production down low enough. Everyone's focusing on gas liquids and oil, and that's still releasing a lot of (dry) gas," said Earl Sweet at BMO Capital Markets in Toronto.
Prices in 2013 were seen gaining 21 per cent to $3.99 as the shift away from dry gas to liquids drilling becomes more pronounced, and an improving economy and tighter emission rules lift industrial and electric power demand for gas.
Of the 27 participants in the poll, there were 23 downward revisions and no upward revisions. Four did not participate in the previous poll published in late October. Price estimates ranged from a low of $2.56 to a high of $4.00.
STORAGE SOARS
Gas prices have been weighed down for the past few years by growing production, primarily from shale, but expectations of an impending end-winter storage glut are weighing more heavily right now.
Recent data from the U.S. Energy Information Administration showed that total domestic gas inventories of 3.098 trillion cubic feet were still at record highs for this time of year.
With winter withdrawals so far running more than 300 billion cubic feet, or 37 per cent below average, concerns are growing that storage owners could be forced to dump gas before March 31 to meet minimum turnover requirements.
The rules, which impact more than half of total U.S. storage capacity, require customers to reduce inventories to preset levels by the end of the withdrawal season to make room for injections and avoid pressure damage to storage reservoirs.
That could drive prices back below the recent 10-year low.
"Storage operators are asking people to get their gas out of storage. They understand there will be excess supplies in the market for the balance of winter," said Teri Viswanath at BNP Paribas in Houston, noting some operators recently had even waived penalties for excess withdrawals.
Utilities typically stockpile gas from April through October to help meet 25 per cent of peak winter heating needs.
Most analysts now expect inventories to end winter at about 2.1 tcf, 35 per cent above average and near the all-time high for end-season storage of 2.148 tcf set almost 30 years ago.
The huge cushion, running more than 20 per cent above average, could also spell weak prices late in the stock building season if storage buyers are forced to push even more supply into a glutted market.
"A normal summer injection season could test not only previous record highs for storage, but could also physically challenge the EIA's most recent estimate of ... capacity," Katherine Spector at CIBC World Markets said in a report.
Estimates for U.S. working gas storage capacity range from 4.1 tcf to 4.4 tcf, a level that could be tested if storage builds through October match last year's 2.2 tcf.
MODEST PRODUCTION CUTS
Recent declines in the Baker Hughes gas rig count to a 25-month low below 800, a level some analysts say is needed to slow output, also raised expectations that producers were getting serious about stemming the flood of dry gas supplies.
But analysts say proposed production cuts by some key producers like Chesapeake and Conoco are not nearly enough to tighten a gas market seen oversupplied by as much as 3 bcf per day, or more than 4 per cent.
Analysts may trim production estimates in 2012 based on some economic shut ins, but output is not expected to fall much below last year's record high of 67 bcf per day, meaning supply could still swamp demand again this year.
DEMAND GAINS, MAYBE NOT ENOUGH
Since bottoming in 2009, domestic gas consumption through 2011 gained 6.6 per cent, but production spiked 11.1 per cent during that same period, according to EIA data.
Stronger growth in the economy could make 2012 a more balanced year, as more use by power generators and gas-dependent industries like chemical and fertilizer manufacturers soaks up some of the excess supply.
With oil and coal still more expensive than gas, more fuel switching by utilities could add as much as 1.5 bcf per day, or 2.2 per cent, to total gas demand in 2012. More industrial use could raise consumption by a much smaller 0.2 bcfd.
Tighter environmental rules on emissions should also favor gas, a less polluting fossil fuel, by forcing some power generators to shut less efficient coal units.
Even with imports from Canada slowing and exports to Mexico growing, analysts agree it will be difficult to balance the gas market without more significant production cuts.