US natural gas demand unlikely to recover until 2012

Even though US natural gas drilling has fallen from about 1600 rigs in operation at last year’s peak to about 700 now, the oversupply situation is continuing to build.

Indeed, Wood Mackenzie, the energy consultancy, says prices of natural gas, which have fallen to below $4 per million British thermal units from a high of more than $13 per million British thermal units, will remain low until demand returns to the global economy, to soak up some of the supplies.

Despite the credit squeeze, economic downturn, and low natural gas prices, which are combining to push some companies into bankruptcy, drilling is continuing in some parts of the US because the equipment is under contract and companies figure it makes more sense to use it than not. On top of that, there is the possiblity of losing acreage if companies do not drill on the land before leases expire. And liquefied natural gas (LNG) is flooding in from global markets because the US has the storage to hold the unwanted fuel amid the global downturn. All the while, new coal-fired plants are coming on line in the US to provide still more power  to US markets.

Jen Snyder, north America natural gas principal analyst for Wood Mackenzie, says all of these factors combine to set a scenerio for low natural gas prices until 2012, when no further coal capacity will be coming on line, the global economy should have improved enough to be demanding the LNG shipments now coming to the US, and the US economy itself is demanding more supplies.

The industry is now long supply in a weak environment.

Ms Snyder noted that even if the economy recovers around 2010, the demand for natural gas will lag largely due to the displacement of gas from new coal capacity.

George Given, head of global power for Wood Mackenzie, said the extent of the demand destruction means it is going to take four years or more to get back to levels of demand that were anticipated for the US demand just six months ago.

There is a four year increase in supply because of the recession.

With so much oversupply, Mr Given says it does not make sense to be pouring so much into renewables to supply still more power:

Although carbon regulations and more renewable generation have caught the public’s attention, the reality of realising these goals seems out of sync with the current market environment and the near-term outlook.

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