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Shale Boom Heralds Fifth Year of Gas Declines

Booming U.S. natural gas production from shale formations and slowing demand from households, factories and power plants are poised to send prices down for an unprecedented fifth year in 2012.

Gas may tumble 8.2 percent from its 2011 average next year, as output rises 2.8 percent to a record 67.72 billion cubic feet a day, according to the Energy Department. Demand will probably climb 1.7 percent, after a 1.8 percent increase this year, the department said in its Dec. 6 Short-Term Energy Outlook.

“It’s been practically impossible to turn off the shale- gas tap,” Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, said in a telephone interview Dec. 14. “Industrial demand has been rising, but it’s not enough.”

Natural gas has dropped 28 percent on the New York Mercantile Exchange this year, the most since 2006, as improved drilling technology and profits from selling gas liquids encouraged producers to pump record amounts of the fuel from shale formations from Texas to Pennsylvania. Futures have dropped in each of the past three years, the longest stretch of declines since the contracts began trading on the Nymex in 1991.

Gas at the Henry Hub in Erath, Louisiana, the delivery point for New York futures contracts, will slip to $3.70 per million Btu next year, the Washington-based Energy Department said in its Dec. 6 report. It would be the lowest average price since 2002, according to data compiled by Bloomberg. The average spot price for the current year is $4.03 per million Btu.

Citigroup Cuts Forecast

The January contract rose 1.2 percent to $3.164 per million British thermal units at 4:16 p.m. in electronic trading on the Nymex after settling at $3.155.

Citigroup Global Markets Inc. cut its forecast for the average 2012 natural gas price to $3.30 on Dec. 19, citing production growth and record inventories. The bank previously predicted $4.10 if a colder-than-normal winter materialized and $3.85 should temperatures stay close to the 10-year average.

Average year-to-date supply growth has climbed to a “staggering” 4.5 billion cubic feet a day, J. Marshall Adkins, an analyst at Raymond James & Associates in Houston, said in a note to clients Dec. 5.

“With that much gas supply growth, it’s a wonder why prices weren’t even lower this year” said Adkins, who lowered his 2012 price estimate to $3.50 per thousand cubic feet ($3.41 per million Btu) from $4.

Improved Technology

The drilling of longer horizontal sections of wells and fracturing of rocks in multiple locations have helped producers increase output from formations such as the Marcellus shale in the U.S. Northeast even as prices fell, Sieminski said. Production from shale deposits, where water and chemicals are pumped underground at high pressure to break apart rock and release gas, more than doubled from 2007 to 2009, according to the most recent Energy Department data.

“While our previous outlook anticipated a slow decline in gas-well completions and connections in 2012, we now believe they will come to market at about the same pace as in 2011, resulting in supply growth through 2012 and 2013,” Michael Zenker, an analyst at Barclays Capital in New York, said in a Nov. 1 note. Prices will average $3.80 per million Btu next year, down from a previous forecast of $4.55, he said.

Rising prices for gas liquids such as ethane and propane, which are byproducts of natural gas production, have also supported higher shale output, Sieminski said. The price of ethane at the Mont Belvieu hub in Texas has climbed 28 percent this year to 80 cents per gallon, according to data from Liquidity Partners, a Houston brokerage.

Rig Declines

A drop in drilling rigs and rising exports to Canada may stop the price declines in 2012, said Dan Rice, managing director of BlackRock Inc.’s global resources team in Boston, who oversees more than $5 billion in assets. Prices may average $4 next year, rising to $4.50 in the second half of 2012, he said in an interview on Dec. 14.

The number of rigs drilling for gas in the U.S. dropped two to 818 in the week ended Dec. 16, the lowest amount since Jan. 15, 2010, according to data from Baker Hughes Inc. in Houston. It was the seventh consecutive weekly decline. U.S. gas exports to Canada totaled 77.4 billion cubic feet in September, up 56 percent from a year earlier, Energy Department data show.

Production from the Haynesville shale in Louisiana has averaged 6.8 billion cubic feet a day in 2011, or 11 percent of total U.S. marketed production, Scott Hanold, an analyst at RBC Capital Markets in Minneapolis, said by phone Dec. 15. Marcellus gas is contributing about 3 billion a day, he said.

‘Incredible’ Growth

“The Haynesville shale is growing at an incredible rate and has become a meaningful part of overall supply,” he said. “The bottom line is that it’s going to be tough to absorb this supply with incremental demand growth in the short term,” said Hanold, who was the second-most accurate forecaster of natural gas prices through Sept. 30, based on a Bloomberg ranking of 23 analysts.

This winter will probably be milder than last year in the Northeast and mid-Atlantic states, limiting heating-fuel demand, Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Maryland, said in a Nov. 21 revised seasonal outlook. About 51 percent of U.S. households use gas for heating, according to the Energy Department.

The period from November through March may be warmer than last year while still cooler than the 10-year average, Rogers predicted. In October he said that the coming U.S. winter may be the coldest in more than 10 years.

Record Supply

Inventories of gas reached an all-time high of 3.852 trillion cubic feet in the week ended Nov. 18, Energy Department data show. Stockpiles totaled 3.729 trillion as of Dec. 9, 10.3 percent above the five-year average and 4.3 percent higher than last year’s level for that time of year.

Consumption may rise at a slower pace in 2012 after climbing to 67.18 billion cubic feet a day, according to the Energy Department. Demand from factories, including fertilizer producers that use gas as a feedstock, may be tepid amid economic weakness, said Peter Buchanan, senior economist at CIBC World Markets Inc. in Toronto.

Industrial demand for gas may climb 0.2 percent next year after gaining 2.3 percent in 2011, the Energy Department said in the Dec. 6 Outlook.

U.S. industrial production unexpectedly dropped in November for the first time in seven months, indicating a pause in manufacturing growth, figures from the Federal Reserve on Dec. 15 showed. Output at factories, mines and utilities declined 0.2 percent after a 0.7 percent gain in October. Economists forecast a 0.1 percent advance, according to the median estimate in a Bloomberg survey.

“We’re probably going to see slower growth on the industrial-demand side,” Buchanan said in a telephone interview on Dec. 15. “The factory sector has lost a bit of momentum.”

To contact the reporter on this story: 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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