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Natural-gas futures going up fast

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Staff writer ▼ | January 27, 2014
Natural gas futures jumped, set for their highest settlement in about 2 and a half years, and EIA's outlook projects declines in U.S. oil and natural gas imports.
Natural gas
Natural gasNatural gas futures jumped, set for their highest settlement in about 2 and a half years, and EIA's outlook projects declines in U.S. oil and natural gas imports.

"With tight fundamentals, $5 gas is not impossible,"” analysts at Citi said. Natural-gas futures haven't closed at $5 or above since mid-2010. Strong demand is expected to push gas inventories to very low levels with cold weather lingering, the Citi analysts said, adding that the end of March level is expected to fall to 1.256 trillion cubic feet.

As of the week ended January 10, they stood at 2.530 trillion cubic feet, down 443 billion cubic feet from the five-year average, according to data from the Energy Information Administration (EIA).

"If a blocking pattern were to form over the North Atlantic/Greenland area, then cold air could be trapped in the Eastern U.S., keeping temperatures low, driving demand higher and depleting gas inventories further The production growth that the market is counting on to replenish storage may disappoint," Citi said.

Citi expects production to grow by 2.7 billion cubic feet per day but the output may come well short of the target. "Very cold weather could slow oil and associated gas production growth."

At the same time, the Energy Information Administration' 2014 Annual Energy Outlook projects declines in U.S. oil and natural gas imports as a result of increasing domestic production from tight oil and shale plays.

U.S. liquid fuels net imports as a share of consumption is projected to decline from a high of 60% in 2005, and about 40% in 2012, to about 25% by 2016. The United States is also projected to become a net exporter of natural gas by 2018.

The reasons for these shifts are different between emerging and developed economies. In China and India, oil demand growth from emergent middle classes will likely outpace domestic production, while OECD Europe will likely become more import reliant as a result of declining oil production in the North Sea.

As noted in the 2013 IEO, China will experience the largest absolute growth in liquid fuels consumption, growing by about 46% by 2020 and doubling by 2040 from 2010 levels, as it moves from an industrial manufacturing economy to a more service-oriented economy with greater automobile saturation.

China will also experience the largest growth in natural gas demand because the government is promoting gas as a preferred fuel to help alleviate air pollution. From 2010 to 2020, EIA projects natural gas consumption to rise at an average rate of 7.5% per year, while production will grow by an average of 2.4% per year, with growing shares from coalbed methane and shale gas coming on line by 2020.

EIA expects India to have the fastest growth rate in liquid fuels consumption from 2010 to 2020 (3.0% per year) and the second-largest absolute growth (behind China), primarily driven by diesel fuels used in transportation, irrigation, manufacturing, and electricity generation. EIA projects India's natural gas consumption to grow on average by 1.5% annually from 2010 to 2020, while production decreases by an average of 1.1% per year during that time period.

EIA expects demand for oil products in OECD Europe to plateau as most countries will see their population remain flat. Oil output from the North Sea, the largest source of European production and the location of the Brent International price benchmark, reached its peak production level in 1996, and EIA expects an average annual decline of 2.9% from 2010 to 2020.

EIA projects overall natural gas production to decline about 2.6% annually from 2010 to 2020 before returning to 2010 levels in 2040. European natural gas consumption will grow at a modest 0.3% per year from 2010 to 2020.