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EIA Sees 2 Bcf/d of Shut-ins, Higher Prices Through December

With projected Gulf of Mexico shut-ins of at least 2 Bcf/d running through December and the Weather Service predicting a slightly colder than normal winter for the Lower 48 states, the Energy Information Administration (EIA) estimates residential heating customers will pay 48%, or $350, more this winter for natural gas as wholesale prices average $11.40/Mcf (under normal winter weather) October through March.

In its combined Short-Term Energy and Winter Fuels outlooks released last Wednesday, EIA identified the critical factor as the extended shut-ins from Hurricanes Katrina and Rita. The agency is projecting shut-ins in the federal offshore Gulf will average 5.2 Bcf/d through October with prices for the month averaging $13.72/Mcf. It forecasts shut-ins of 3.7 Bcf/d through November with prices averaging $12.76/Mcf, and predicts 2.1 Bcf/d of shut-in gas through December with prices averaging $11.96/Mcf. The agency said the estimates reflect a "medium recovery baseline scenario."

"Complete recovery of energy infrastructure from hurricane damage will take many months. However, considerable recovery should occur by the end of 2005," EIA said.

In a separate assessment, Energy & Environmental Analysis (EEA) went beyond the end of the year, saying it expected Gulf shut-ins to average 2 Bcf/d through the winter and prices at the Henry Hub to average $13/MMBtu during the same time period. Cumulative offline production from September through March is likely to total 680 Bcf or about 6% of U.S. production, EEA said.

Because of Katrina and Rita, expected working gas in storage at the end of December is expected to be about 2.5 Tcf, or 200 Bcf below year-ago levels and about 50 Bcf above the five-year average based on EIA's projected recovery schedule. The agency notes, however, that a different recovery profile would mean a different storage level. "For example, each 3.3 Bcf of daily supply reduction sustained over the course of a month translates into a supply loss of roughly 100 Bcf."

While the $11.40/Mcf average projected wholesale price for the five months reflects a normal winter, EIA predicted a 10% warmer than normal winter would result in a $10/Mcf average and a 10% colder than normal winter would deliver a $13.20/Mcf average. The National Oceanographic and Atmospheric Administration's Climate Prediction Center is forecasting a winter that is only 0.4% colder than normal for the Lower 48 states. However, that would be 3.2% colder than last winter.

Under the baseline weather case, Henry Hub natural gas prices are expected to average about $9.00/Mcf in 2005 and about $8.70/Mcf in 2006, EIA said. As of Oct. 11, Minerals Management Service (MMS) surveys show shut-in natural gas in the offshore Gulf declined to 6 Bcf/d of natural gas, about 60% of normal production. "There are also significant outages of natural gas and oil production remaining in areas under Louisiana's jurisdiction, EIA said. The MMS reports a cumulative loss of 272 Bcf of natural gas production in federal Gulf waters from Aug. 26 through Oct. 11.

While increased bills paid by residential gas customers will average nearly 50% higher, heating oil bills will average 32% higher or $378, propane bills will be $325 or 30% higher and households heating with electricity will pay only 5% or $38 more.

As for 2006, it's increases all across the board for natural gas, according to EIA. Total natural gas demand is expected to recover by 3%, domestic dry gas production is expected to increase by 4.2% and LNG imports should be up 10.4% in 2006. The demand growth is due to an assumed return to normal weather and a recovery in consumption by the industrial sector. Industrial use is projected to increase by about 6% over 2005 levels after declining about 8% between 2004 and 2005..

The industrial rebound in 2006 is partly because of assumed reactivation of damaged industrial plants in the Gulf of Mexico region but also reflects renewed fuel demand growth as domestic industrial plants adjust to higher prices. Power sector demand growth continues through the forecast period along with electricity demand growth.

LNG imports, lured away from U.S. shores for much of 2005 because of higher prices elsewhere, are expected to increase in the fourth quarter as U.S. prices approach world levels. Currently, total LNG imports for 2005 are expected to be approximately 680 Bcf compared to 650 Bcf in 2004; LNG imports are projected to be just over 1,000 Bcf in 2006.

The price of West Texas Intermediate (WTI) crude oil is projected to average close to $58/bbl in 2005 and $64-65/bbl in 2006, EIA said. Retail gasoline prices are expected to average close to $2.35 per gallon in 2005 and about $2.45 in 2006. Residential electricity prices are expected to average 9.3/kWh in 2005 and about 9.5/kWh in 2006, with significant regional differences depending on the fuel mix used to generate electricity in each region of the country.

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