Supply outlook good news for consumers, bad news for producers By Myra P. Saefong, MarketWatch TOKYO (MarketWatch) -- The U.S. may be experiencing its coldest winter in a quarter century -- and while that's bad news for producers, consumers have reason to celebrate. True, futures prices for natural gas have more than doubled in the last 5 months to trade above $5 per million British thermal units in New York, but they're nowhere near the high above $13 they saw in 2008 and they're likely to sit tight at current levels for awhile because of ample supplies and forecasts for growing production. "There is virtually no way that natural gas will have any supply restraints for 2010, and probably not for 2011," said Charles Perry, president of energy consulting firm Perry Management. "There is simply too much gas available to allow any increase in prices" for this year. U.S. natural-gas production climbed 10.6% from 2007 to 2009, according to Perry, with most of the increase due almost entirely to new production derived from shale, a geologic formation. "This boom caused over-production in gas in the U.S.," said Perry. The oversupply, along with a recession and fall in consumption of 1% from 2007 to 2009, helped drive wellhead gas prices down to $3.70 in 2009 from $8.07 in 2008, he said. This winter's cold snap in the U.S. appears to have helped stabilize prices for now. Population-weighted, from the Plains east, this winter will likely beat the 2000-2001 winter season to become the coldest winter since 1983-1984, according to Joe Bastardi, a senior meteorologist at AccuWeather.com, with the weather in the last 10-15 days of this month probably cold enough to officially make this winter the coldest in a quarter century, he said. But the severe weather hasn't been successful enough in bringing down natural-gas inventories. "There is plenty of shut-in production to take care of any weather- or industrial-use [demand] surges," said Bernard Feshbach, president of investment firm Feshbach & Sons. And while withdrawals to supplies in storage have been strong, the U.S. underground storage inventory is at the high point of the last 5 years after hitting a record of 3.9 trillion cubic feet, Perry said. And "we are far enough through the winter now to know storage inventories will still be at the high end of 5-year storage inventory levels by the end of the [supply] withdrawal period." So the storage "overhang," over both this time last year and the 5-year average, should provide some downward pressure despite continued cold weather," said Beth Sewell, a managing partner at Quantum Power & Gas Services. Long-term price pressure The natural-gas market also looks well supplied for years to come. "With the availability of multiple shale-gas reservoirs and growing LNG [liquefied natural gas] supplies, the natural-gas supplies for the U.S. appear to be plentiful for at least 20 years," Perry said. When development of the nation's shale-gas reservoirs is completed, estimated shale gas will total around 9 trillion cubic feet per year -- equal to 40% of the country's production in 2009, he said. Producers likely already have the incentive to develop these shale sources too. "All shale reservoirs become economical for $5 to $6 gas and the price is there now," said Perry. Analysts have told Platts that while there's a more than 50% drop in gas rig count over the past year from low gas prices and oversupply, production is only down "marginally" because producers are ramping up shale plays, where gas is "extracted more quickly and cheaply," according to Mark Davidson, editorial director of U.S. Gas News at Platts. "This has meant supply continues to exceed demand, and there's no sign of that production boom abating."

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