Gas to Climb in 2011 as 5-Year Output Gain Ends: Energy Markets

Natural gas prices may rebound next year as producers cut output for the first time in six years amid record stockpiles and an expanding U.S. economy.

A 21 percent drop in prices this year will contribute to a decline in drilling for the fuel sold to factories, power plants and homeowners, the Energy Department said in its monthly Short- Term Energy Outlook on Dec. 7. Output will average 62.01 billion cubic feet a day in 2011, down from a record of 62.09 billion this year, the department estimated.

Chesapeake Energy Corp., the second-largest U.S. gas producer after Exxon Mobil Corp., said last month it will reduce gas drilling and focus on oil until gas prices rise. The fuel may average $5 per million British thermal units in 2011, up 13 percent from current prices, according to the median of 15 analyst estimates compiled by Bloomberg since September.

“Production will flatten out in the next several months and then potentially start to decline after that, probably in the second half of the year,” said Jonathan Wolff, a New York- based analyst at Credit Suisse Group AG, which is predicting an average price of $5.25 in 2011. “We don’t see it as being exciting to drill a gas well at these prices.”

Natural gas for January delivery fell 1.8 cents, or 0.4 percent, to settle at $4.417 per million Btu today on the New York Mercantile Exchange.

Factory Fuel Use

Industrial demand for gas will rise as the U.S. economy recovers from the worst recession since the 1930s. Purchases by manufacturers, steel mills and chemical plants will gain 1.1 percent in 2011 to an estimated 18.09 billion cubic feet a day, according to Energy Department estimates.

A tax-cut package proposed by President Barack Obama may bring inflation-adjusted growth in the U.S. economy to a 4 percent annual rate in the fourth quarter of 2011, Deutsche Bank Securities economists said in a note to clients dated Dec. 7. Growth this quarter is an estimated 2.5 percent, according to a Bloomberg News survey of economists.

“Industrial demand is coming back already,” said Jason Schenker, president of Prestige Economics, an energy consulting company in Austin, Texas. “Storage withdrawals have been a bit larger than historical numbers even though new supplies are coming to market, which implies that demand is going up.”

Stockpiles of gas have climbed to records for two consecutive years, reaching 3.843 trillion cubic feet in the week ended Nov. 12, according to the Energy Department. Supplies decline during the cold-weather months, when demand exceeds production and imports.

Chesapeake’s Plans

Chesapeake, based in Oklahoma City, will cut the gas portion of its drilling program to a third by 2012, down from 90 percent last year, according to Chief Executive Officer Aubrey K. McClendon.

“If gas prices rebound and the country says we need more gas, we can absolutely respond to that very quickly,” McClendon said in a conference call on Nov. 4. “But right now the focus is on oil because it’s three or four times more profitable.”

Chesapeake projected that gas prices may average $4.50 in 2011 and $5.50 in 2012.

“Production will start to tail off in the latter part of next year,” said Scott Hanold, an energy analyst at RBC Capital Markets in Minneapolis, who forecasts a 2011 average price of $5. “More than half of the plays out there are probably not making the economic rate of return.”

Output from shale wells rose 71 percent in 2008 to 2.02 trillion cubic feet, accounting for 17 percent of U.S. supply. Gas output has been rising since 2005.

Shale Gas

Production from the Haynesville shale in Louisiana and East Texas, which produces “dry” natural gas without oil or liquids, may tumble as producers fulfill the terms of leases that required them to drill within a certain time frame, said Ray Deacon, an analyst at Pritchard Capital Markets in Warren, Rhode Island, who predicted gas will average $5 next year.

The Energy Department “expects drilling activity to decline in 2011 because of relatively lower natural gas prices,” the government said in the Dec. 7 outlook.

Bank of America Merrill Lynch and Societe Generale SA say prices will keep dropping.

Merrill analysts led by Francisco Blanch in New York cut their forecast to $4.60 per million Btu from $5 previously, citing a “well-saturated” market and higher-than-expected drilling rates.

“Rigs need to fall by at least 20 to 25 percent over the course of 2011 in order to significantly slow the pace of new supply and thus support prices,” the bank said in a report dated Dec. 3.

Onshore gas production will create a supply glut in places including the northern Rockies, Louisiana and Pennsylvania, Societe Generale said in a research note Dec. 8. The bank on Nov. 3 lowered its 2011 price forecast to $3.56 per million British thermal units from $3.75.

The number of U.S. gas drilling rigs rose eight to 961 in the week ended Dec. 3, up 28 percent from a year earlier, Baker Hughes Inc. data show.

To contact the reporters on this story: {Moming Zhou} in New York at mzhou29@bloomberg.net; {Christine Buurma} in New York at cbuurma1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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