Natural Gas Price Forecast Confusing; Close to $6/MMBtu Industry Consensus

Forecasting the prices of commodities such as natural gas and crude oil is far from a scientific endeavor. It is pure art, which means a lot of estimating and approximation – closer to crystal ball gazing! Sure, statistics, computer modeling, mathematics, and a host of more scientific ways and means play a role in the eventual outlook, but it is still art. A ouija board would be an ideal instrument in the forecasting business.

Reason for the difficulty is that estimating the future prices of primary energy products like crude oil and natural gas includes a multitude of variables. Even products like gasoline and distillate have more variables. Many of these variables, while somewhat predictable, are more the products of Mother Nature, chance, or economic forces beyond human control or even conception.

Who can predict with certainty what the weather will be six months from now when it is difficult getting next week’s forecast? Economic changes can change with political winds. Government impact is an unknown, especially with changes in the administration and pressure from environmental and climate-concerned groups. Forecasting – it is art, not science!

Crude oil and natural gas, in the big picture, ultimately follow the outcome of the supply/demand scenario. Crude oil, which is more an international commodity and so much the basic fuel of the transportation industry, is more complicated to predict although it has many factors in common with natural gas. Because of space limitations, this article will look only at the forecast for natural gas and some of the factors that influence the expected prices. Still, to set the total picture, a crude price forecast is also made.

Crude oil markets have returned from the highs and lows of 2008 (monthly average $134/B and $41.43/B, respectively with a high of $147.27/B in July 08) to levels about half of the highs reached then. West Texas Intermediate (WTI) prices are running about $70-75/B.

Average price in 2009 was $62/B, according to the government’s Energy Information Administration (EIA). Expectations from the EIA are crude will average $80/B in 2010 and $84/B in 2011.

Natural gas prices were more volatile than crude oil (no pun intended) since their highs and lows of 2008 were for a monthly average of $12.69/MMBtu and $5.83, respectively. The high reached in July 2008 was $13.75/MMBtu at Henry Hub. In the past 18 months, Henry Hub gas prices have gone from a monthly low of $2.94/MMBtu reached after the 2008 high to a monthly high of $5.18/MMBtu in January 2010. Current Henry Hub prices are around $5.50-5.75/MMBtu.

The estimate by JOFREE Energy Consultants for 2010 is $5.90/MMBtu and for 2011, $6.60. Since forecasting is an art, not a science, and since perception is an individual thing, some additional forecasts offer an interesting analysis of what to expect. The natural gas price is $5.37/MMBtu for 2010 and $5.86 for 2011 as forecast in the EIA February 2010 Short-Term Energy Outlook.

Another good source of gas price forecasts is the quarterly forecast made by the trade publication, Natural Gas Week. With about 18 respondents comprising the forecasting panel, its projected prices when converted to Henry Hub prices are $5.61/MMBtu for 2010 and $6.16 for 2011.