Analyst expects gas demand to hit 5-year high

Gas Daily May 30, 2007

US gas demand in 2007 should reach its highest level in five years, fueled by a cold winter and expectations for another hot summer, independent analyst Stephen Smith said Tuesday.

The president of Natchez, Mississippi-based Stephen Smith Energy

Associates estimated that 22.6 Tcf will be consumed this year, a 3.4% increase over 2006 levels and the highest level since 2002, when demand hit 23 Tcf.

“Total US gas consumption, other than weather effects, has been largely unchanged since 1995,” Smith said. But the cold weather that blanketed much of the country during the first four months of this year will prompt “a substantial increase” in heating degree-days for 2007 as a whole and “is the main driving force for the total gas demand increase for the year.”

Gas use by the residential sector should soar 9.5% this year, while the commercial sector’s consumption should rise 7%, Smith said. The power-generation sector should use 3.4% more gas than in 2006 based on an assumption that cooling degree-days will be 5% above average this summer. However, the downward trend in the industrial sector should continue, with demand dropping about 1.1%, he said.

Due to the overall demand surge, Smith estimated a full-year Henry Hub bidweek average price of $7.80/MMBtu, up 5% from his most recent estimate of $7.40/MMBtu. Smith also raised his forecast for 2008 to $7.50/MMBtu from $7.10/MMBtu, and predicted an average $7.20/MMBtu price in 2009 and 2010, up from $6.95/MMBtu and $6.85/MMBtu, respectively.

But the higher prices should not dissuade storage operators from refilling their supplies this year. Though storage levels at the beginning of June should hold about 145 to 150 Bcf below year-ago levels, Smith said that by the end of August, inventories should hit 3.08 Tcf, surpassing year-earlier levels by about 114 Bcf.

Though several forecasts have called for a warmer-than-normal summer, Smith noted that storage stocks last fall were “high enough to raise storage capacity concerns and add downward pressure to prices” despite an extraordinarily hot summer.

US gas production rose 1.5% in the first two months of this year compared with the same period of 2006, Smith estimated, though that increase “may have included some benefit from deferred start-ups of production that had been lost” to Hurricanes Katrina and Rita in 2005. Overall, domestic production should grow by a modest 500,000 Mcf/d this year, he said.

Although Smith said his forecasts assume no loss of gas production to hurricanes through the end of August, “hurricane expectations could have a large influence on the late-summer gas price if an extremely hot summer should erode the storage surplus by late August.”

Liquefied natural gas imports have been running about 1 Bcf/d higher than last year since about March 10 and should continue that trend for much of this year, Smith said. Meanwhile, a 200,000 Mcf/d drop in gas imports from Canada will likely “provide only a partial offset to comparative LNG strength.” MT