As of April 16, 2010, natural gas rotary rigs totaled 973, the highest level in close to 14 months, according to Baker Hughes. Horizontal rig growth has contributed to the general increase in the natural gas rig count since July 2009, according to basin-level rig data released by Baker Hughes on 30 March. Other major natural gas basins over the last two years for which data are available have not shown the same growth in rigs. For example, natural gas rig counts in the Western Gulf and Anadarko regions are well below their levels at the beginning of 2008.
Consumption growth in 2010 remains largely dependent on the timing and pace of economic recovery. Based on current assumptions, 2.2 per cent growth in the electric power sector combined with a slight growth in the residential and industrial sectors are all expected to contribute to 2010 consumption growth.
Included in the natural gas outlook, prices could remain low over the next few years as new coal-fired electricity plants open, reducing the overall amount of the natural gas used to generate power. According to Jen Snyder of Wood Mackenzie, when these new plants come online, demand for natural gas could rise sharply as older coal-fired plants are retired and government policies show a greater preference for cleaner energy sources.
According to the EIA, with so much gas in storage the outlook for natural gas annual production in 2010 is expected to decline relative to 2009 in the Federal Gulf of Mexico and Lower-48 non-Gulf of Mexico by 6.3 and 0.6 per cent, respectively.
Working natural gas in storage increased to 1,829 Bcf as of Friday, 16 April, according to EIA’s Weekly Natural Gas Storage Report. The implied net injection was 73 bcf, compared with last year’s net injection of 42 bcf and the five-year (2005-2009) average of 33 bcf for the reported week.
Contributing to the natural gas outlook, the price disparity between natural gas and oil has widened, leading some to believe that there is a natural upward pressure on natural gas. Part of the reason oil is experiencing higher prices is from the growing demand from emerging economies. While North America has an overabundance of natural gas, it is difficult and costly to export. Therefore, the market for gas remains within the continent. The relative price of natural gas to oil is changing as the dynamics of demand for oil are changing. We should not depend on the relationship to drive the price of gas in the future. Substituting natural gas for oil requires substantial capital investment. Following government policy, the focus is to bypass natural gas as a fuel for transportation and go directly to electricity.
With the high levels of storage, producers have curtailed drilling programmes. This means production will taper off in the spring to summer of 2010. If companies do not pick up their drilling in the middle of 2010, available supply will not come online to recharge storage. This could lead to an increase in prices as supply fails to reach prior levels, meaning the earliest natural gas prices can make a comeback is late 2010.
Bullish Factors
Climate change concerns will lend further support to gas demand. As carbon emissions start coming with a price attached, cleaner-burning gas will be increasingly favored over coal for fueling power plants. Many newer plants use dual-fuel designs, enabling them to switch readily to whichever fuel is cheapest. As the hidden subsidy of externalized emissions costs is taken away from coal, gas will be cheaper, and it will stay cheaper. The vehicle angle is another hugely bullish factor for gas, but so far the markets don’t seem to have discounted it at all. The longer prices remain too low to sustain increased drilling, the more tension there will be in the price slingshot.
A year from now, we will be looking back on those analysts who predicted US $2 natural gas by the end of this year with the same sad regard that we now have for the ones who saw oil trading in the US $40s in December and thought it was going to US $25.
You may recall that’s when market got bullish. I feel exactly the same way about gas now.
Another reason to start getting bullish is the extremely bearish gas sentiment itself. We haven’t seen gas prices stay this low in years, and gas continues to trade at a historically low price relative to oil on an energy basis. As Warren Buffett likes to say, “Be fearful when others are greedy, and be greedy when others are fearful.”
Source: energybusiness.in
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