Schork Oil Outlook: Lots of Natural Gas, Naturally
Last week the EIA released its latest Short Term Energy Outlook. The big ticket numbers include WTI averaging $93 per barrel in 2011, gasoline prices at the pump averaging $3.15, and household expenditures on electricity remaining flat. Our focus today is on natural gas, with Henry Hub prices expected to average $4.16 per MMBtu in 2011, $0.22 below last year’s average.
On the demand side, natural gas consumption can be split in to four major uses: industrial, residential, commercial and electricity generation. While total consumption is expected to increase 1.14% between 2010 and 2012, the breakdown is mixed. Combined commercial and residential consumption is forecast to decline by 2.45% due to space heating efficiencies. Instead, consumption growth comes mainly from the electric power sector, which sees growth of 3.44% to 20.32 Bcf/d by 2012.
This is in line with the majority of recently built electricity generation plants having the ability to burn natural gas as a fuel. The rest of the gains come from the industrial sector, though this is more a function of a generally improving economy than a gas-specific fundamental shift.
On the other side, total marketed production is expected to increase 1.98% over this time-step, with the largest growth rates coming from the lower 48 States (excluding the Gulf of Mexico), with shale plays expected to add 1.67 Bcf/d of production in the region. However, the EIA predicts that these gains will be somewhat offset by a 0.46 Bcf/d decrease in production at the Gulf of Mexico, due to a shift from dry gas drilling to liquids drilling.
Frankly, the historic data does not seem to correlate with this assumption. Average annual production in the GoM dropped by an average of 10.19% between 2002 and 2006. However, for the next five years, the average rate of decline came to just 5.77%. In fact, average production in 2009 actually rose by 4.95%. Thus we are inclined towards a plateau in the rate of production decreases. The EIA cites falling rig counts and a switch to liquids, yet we counter that increased efficiencies could over-compensate for declining rig counts.
Yet, at this point we are splitting hairs. If we assume the EIA’s production declines are correct, analysts at The Schork Reportproject production to safely outpace de-seasonalized demand. In the long term, we (and everyone else, it seems) remain bearish natural gas.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.