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NGSA: Warm Temps, Flat Production, Higher Demand Should Raise Summer Prices

Greater upward pressure is expected on natural gas prices this summer due to projected warmer-than-normal weather in portions of the United States, a potentially active hurricane season, increased gas demand and flat production, the Natural Gas Supply Association (NGSA) said last Thursday. The association said the market impact of high gas storage levels will be far outmatched by the numerous other bullish factors influencing prices.

The National Oceanographic and Atmospheric Administration (NOAA) has predicted above-normal temperatures this cooling season for many western and southeastern states and cooler-than-normal temperatures in the Great Plains. "This is likely to lead to more cooling degree-days than last year for the nation as a whole, while also putting pressure on natural gas-fired generation in those regions," the producer group said in its third annual outlook for the cooling season (which runs from April through October).

Also adding to the pressure on prices is NOAA's prediction of an above-normal hurricane season, NGSA Chairman Joseph Blount told reporters at a press briefing in Washington, DC. The agency anticipates seven to nine hurricanes from June through November, with three to five of these expected to be a Category 3 or above (winds of more than 111 miles per hour).

The industry could very well see a repeat of last summer when Hurricane Ivan lashed into the Gulf Coast, curtailing more than 170 Bcf of natural gas production for an extended period, Blount noted.

While gas prices are projected to trend higher this summer, Blount and other NGSA officials questioned how high they might go. Energy analysts foresee gas prices averaging anywhere from $5.75/Mcf to $7/Mcf this year. The "overall energy pricing structure" is in a "bullish mode," Blount noted.

Gas consumption is anticipated to grow by 4.5% to 53.5 Bcf/d this summer from 51.2 Bcf/d a year ago, with the electric sector accounting for two-thirds of the growth, according to the NGSA outlook. The group foresees a marked increase in gas demand for generation in the Pacific Northwest, where hydroelectric generation will likely decrease because of drought conditions in the region.

Due to a gain in the number of residential consumers, demand in this area is expected to rise to 6.5 Bcf/d from 6.2 Bcf/d, or about 4%, from last summer; demand in the commercial sector is projected to be 5 Bcf/d, or about the same as last summer; and a modest 1.6% gain, or 0.3 Bcf/d, is seen for the industrial sector during the summer months, according to a NGSA-commissioned forecast by Virginia-based Energy Ventures Analysis Inc. (EVA).

At the same time, NGSA noted that the Energy Information Administration is projecting that domestic gas production this summer will be flat with last summer's production. "Producers are responding to market conditions, but are only managing to tread water in terms of production. Despite a significant increase in annual well completions, overall supply remains flat as finds become smaller and less economically viable."

Blount said producers "are putting a lot of capital in the ground," but the gas industry is not seeing any action from policymakers with respect to removing land access restrictions and the moratorium on exploration and production (E&P) in much of the Outer Continental Shelf.

It's estimated that summer 2005 gas production will fall short of U.S. demand -- at 51.5 Bcf/d, compared to 51.1 Bcf/d a year ago. The U.S. also will get less help from Canada this summer to fill the supply-demand gap. Canadian gas exports to the U.S. are expected to tumble to 8.7 Bcf/d this summer from 9.1 Bcf/d in the summer of 2004. Liquefied natural gas (LNG) imports, however, are anticipated to climb 31% to 2.1 Bcf/d this summer from 1.6 Bcf/d a year ago.

The drop in Canadian gas exports is due to the fact that U.S. storage needs will be lower this summer, while Canadian gas consumption is anticipated to rise slightly, the NGSA said.

Domestic storage levels at the start of the summer season (1,249 Bcf) were at the third-highest level since 1994, it noted. "Because natural gas in storage is relatively high, the industry won't need to inject as much each week, compared to last summer. It is expected that the industry will maintain injections averaging 67.7 Bcf per week compared to 73.9 Bcf last summer, reaching the same record storage levels of approximately 3.3 Tcf at the start of the heating season" on Nov. 1.

"This reduced level of storage injections has the net effect of reducing overall demand for natural gas during the summer period by 1 Bcf/d," NGSA said. The group expects this summer's lower storage refill rate to contribute some downward pressure on wholesale market prices, "but not enough to offset other market factors."

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