The graph above shows the monthly historical prices and future monthly projected prices. The green dashed lines represent the 95% confidence intervals around the upper and lower prices. There is a lot more price risk to the upside than the downside. Image Source: EIA
In its June Short-Term Energy Outlook, the Energy Information Administration (EIA) lowered its estimate for domestic natural gas production growth in 2012 for a second straight month. EIA said it expected natural gas production in 2012 to rise by 2.25 billion cubic feet per day to 68.47 bcfd, still a record high but below its May outlook that had output this year at 69.14 bcfd. The declining production from less profitable dry gas plays like Haynesville in Louisiana will be offset by growth in liquids-rich areas like Eagle Ford in Texas and Marcellus in Appalachia, as well as associated gas from rising domestic crude production. For 2013, the EIA is expecting that low prices will continue to reduce new drilling and sees production growth slowing next year to 1.7 percent.
While production is expected to slow, the agency expects demand to climb 2.7 bcfd, or 4.1 percent, from 2011. Even though cooling degree days are expected to be significantly lower than last year, the EIA said it expects electric power demand for gas to jump 20 percent this year, driven primarily by utilities switching from coal to cheaper gas to generate power.
The increased switching from coal to natural gas from power generation has started to erode the large storage overhang that was present at the end of winter. Storage in late March was 55 percent above last year’s level and as of June 7 it was down to 33 percent above last year’s level. Injections are projected to be below average for the rest of the summer due to high demand from the electric sector and limits on storage capacity, but EIA is still forecasting that inventories will set a new record by the end of October at 4,015 Bcf.
While price are still historically low and below the 2011 average , the Outlook increased 2012 Henry Hub prices from $2.45 MMBtu in the previous report to $2.55 MMBtu in the current report. EIA also revised up its forecast for 2013 by $0.06 cents to $3.23 MMBtu, a 26% increase over the 2012 projected price.