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EIA Raises Gas Price Projections 20% on Crude Forecast, Economy

Although natural gas storage levels remain adequate, high crude oil prices, a continued strong economy and the expectation that Pacific Northwest hydroelectric resources will be well below normal through mid-summer are the principal reasons the Energy Information Administration (EIA) sharply raised its gas price forecasts in its April Short Term Energy Outlook.

High crude oil prices and an unusually cold March pushed gas prices higher to an average of $7/MMBtu at the Henry Hub and cut into the gas storage surplus. EIA said hub prices are expected to remain relatively high, averaging about $6.95/Mcf this year, which is up significantly from the $5.81 the agency predicted in its March outlook.

EIA estimates that working gas levels ended the traditional heating season on April 1 at 1,187 Bcf, which was 12% higher than one year earlier and 14% higher than the five-year average.

Government forecasters now expect gas demand to increase this year by 1.7% to 22.66 Tcf, which is slightly higher than its March forecast. Meanwhile, domestic natural gas production in 2005 is expected to increase by only 0.7% from the 2004 level to 18.91 Tcf, despite an expected 8% increase in gas-directed drilling.

In 2006, natural gas demand is projected to rise by 3.2% to 23.39 Tcf due largely to weather-related factors and continued strength in gas-intensive industrial production. Domestic dry gas production is projected to increase 0.95% to 19.09 Tcf.

EIA said it expects 0.73 Tcf of liquefied natural gas imports this year, up from 0.65 Tcf last year. Pipeline imports (mainly Canadian supply) are expected to fall to 3.52 Tcf from 3.56 Tcf last year. But net imports are expected to rise 3.5% to 3.57 Tcf.

West Texas Intermediate crude oil prices are projected to remain above $50 per barrel for the rest of 2005 and 2006. "Oil prices are likely to be sensitive to any incremental oil market tightness," EIA said. "Imbalances (real or perceived) in light product markets could cause light crude oil prices to increase to levels above the $55 per barrel average projected in the outlook." EIA said worldwide petroleum demand growth is projected to remain robust, despite high oil prices, but is likely to moderate in response to slower Chinese growth.

"Expected growth in non-Organization of Petroleum Exporting Countries (OPEC) supplies is not expected to accommodate worldwide demand growth. Worldwide spare crude oil production capacity has recently diminished and is projected to remain low," the administration said. Freight rates also are projected to remain high in historical terms. And geo-political risks, such as the continued insurgency in Iraq and political unrest in Nigeria and Venezuela, are expected to keep the uncertainty premium high.

Electricity demand is expected to increase by 2.9% in 2005 and by an additional 2.2% in 2006 due to continuing economic growth, following estimated growth of 1.6% in 2004, EIA said. Third quarter demand growth (year-over-year) is expected to be particularly strong, as cooling demand is likely to be higher than in the mild third quarter of 2004.

Hydroelectric power availability, which fell somewhat in 2004, is expected to rebound in 2005 by 11% nationally, down from the 13% forecast in the last outlook. However, the overall improvement is concentrated in regions other than the West Coast. Pacific Northwest hydroelectric resources are expected to be well below normal through mid-summer. Coal demand in the electric power sector is expected to increase 2.3% in 2005 and another 3.2% in 2006.

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