U.S. Natural Gas Consumption. EIA expects total natural gas consumption to increase 0.4 percent to 62.5 billion cubic feet per day (Bcf/d) in 2010 and another 0.4 percent in 2011.  Very cold weather during the first half of January, particularly in the Southeast, contributed to an 8.4-percent jump in the monthly estimate for electric-power-sector natural gas consumption from the previous forecast. The latest estimate for electric-power-sector consumption in January would be a new record for the month.  Although natural gas consumption in the electric power sector has been strong so far this year, an increase in coal-fired generation capacity and higher natural gas prices through the remainder of the year should reduce the share of natural-gas-fired generation in the baseload power mix in 2010.  This is despite lower-than-normal snowpack in the Northwest, which we expect to reduce hydroelectric generation in that region in 2010 to about 8 percent below last year’s level and boost natural gas consumption.  The projected 1.3-percent decline in electric-power-sector natural gas use is offset by growth in the residential, commercial, and industrial sectors in the 2010 forecast.  The outlook for growth in total natural gas consumption in 2011 comes from increases in the industrial sector as a result of improved economic conditions.

U.S. Natural Gas Production and Imports.  Total marketed natural gas production declines 2.6 percent to 58.7 Bcf/d in 2010 and increases by 1.3 percent in 2011 in this forecast.  Working natural gas rigs hit a low of 665 in mid-July 2009, and EIA anticipates that the impact of lower drilling activity last year will contribute to the production decline in 2010.  While the number of working natural gas rigs is currently about 25 percent below the year-ago level, the number has increased during the last month by about 100 rigs to a total of 861 rigs at the end of January.  Current 2010 futures market prices between $5.50 and $6.70 per MMBtu appear to provide the necessary economic incentive to expand drilling programs even further.  As a result, EIA expects monthly natural gas production to begin to slowly increase later this year and continue on an upward trend through the end of 2011. 

Projected U.S. pipeline imports decline by 8.3 percent (0.7 Bcf/d) to 8.1 Bcf/d in 2010 due to the sustained impact of lower Canadian drilling activity and production, as well as increasing demand from oil sands projects in western Canada.  A portion of the decline in pipeline imports this year is expected to be offset by imports of liquefied natural gas (LNG), which were double year-ago levels in January as temperatures plummeted and prices jumped.  The outlook for higher U.S. LNG imports in 2010 is largely due to recent global LNG supply additions in Russia, Yemen, Qatar, and Indonesia.  EIA expects net imports of natural gas to decline in 2011 as flows from Canada remain limited and global demand for LNG strengthens. 

U.S. Natural Gas Inventories.  On January 29, 2010, working natural gas in storage was 2,406 Bcf, 150 Bcf above the previous 5-year average (2005–2009) and 199 Bcf above the level during the corresponding week last year.  Colder-than-normal temperatures in the first half of January led to the largest consecutive-week withdrawal on record as a total of 511 Bcf was pulled from storage during the weeks ending January 8 and 15.  The withdrawals over these 2 weeks were a combined 317 Bcf above the average withdrawal for the corresponding weeks over the previous 5 years.  However, weather turned considerably warmer during the second half of January, and working gas stocks over the last 2 weeks fell by 201 Bcf, compared with the previous 5-year average withdrawal of 357 Bcf.  Despite the large inventory draws in December and early January, EIA expects working gas inventories to finish the first quarter of 2010 at about 1,644 Bcf, or 7 percent higher than the previous 5-year average.    

U.S. Natural Gas Prices.  The Henry Hub spot price averaged $5.83 per MMBtu in January 2009, $0.49 per MMBtu higher than the average spot price in December and $0.36 per MMBtu higher than the forecast for January in last month’s Outlook.  The Henry Hub spot price peaked at $7.51 per MMBtu on January 7, as colder-than-normal weather tightened its grip on much of the country.  Temperatures eased and the Henry Hub spot price fell to about $5.30 per MMBtu by the end of the month.  While the early cold spell contributed to a substantial withdrawal from working natural gas inventories, prices are projected to reflect an end-of-winter storage level that is still above the 5-year average.  The relatively high inventory level combined with the increased supply potential from domestic resources should keep prices from rising dramatically this year.  However, in addition to anomalous weather, unforeseen consumption increases in the electric power and industrial sectors could elevate prices above the current forecast.  The Henry Hub spot price forecast averages $5.37 per MMBtu in 2010 and $5.86 per MMBtu in 2011. 

Both March and April implied volatilities based on natural gas futures market options contracts started the month in the 55-to-60 percent range and finished the month slightly below 50 percent.  Implied volatility for April natural gas options averaged 46 percent per annum for the 5 days ending February 4, 2010.  With the average April delivery price at $5.35 per MMBtu for the 5 days ending February 4, the lower and upper limits of the 95 percent confidence interval were $3.80 and $7.50 per MMBtu, respectively. 

Natural gas delivered to the Henry Hub during April 2009 was trading at $4.60 per MMBtu at this time last year.  Options market participants were pricing the April 2009 implied volatility at 60 percent, producing a lower and upper limit for the 95-percent confidence interval of $3 and $7 per MMBtu, respectively.

Excerpted from

February 10, 2010 Release

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