Many market prognosticators have realized recently that theirgas price projections are quite a bit too low for the rest of theyear because of declining gas wellhead deliverability, a reducedstorage surplus relative to last year and ever increasing gasdemand. The Energy Information Administration joined that crowdyesterday, concluding its wellhead price forecast for the fourthquarter was 25 cents too low. It raised it to $2.41/Mcf in its MayShort Term Energy Outlook.

A month ago, EIA was saying wellhead prices wouldn’t make itabove $2 this year. But its revised wellhead price forecast for theyear jumped 21 cents to $2.08. “A tighter supply and demandsituation (declining storage and increased demand), higher crudeoil prices, cool spring weather, and a diminishing natural gas rigcount are all factors contributing to the expected higher prices,”EIA said. “The composite spot wellhead price, for example,increased by about 18% from March to April due in part to expectedstrength in gas demand for power generation during the cooling (airconditioning) season. We are now projecting prices over $2/Mcfthroughout the forecast period. Next year, assuming normal weather,natural gas prices at the wellhead are projected to continue toincrease (by about 9%) as the supply/demand balance is projected tobecome even tighter.”

The increase in prices is expected to slow the decline in gasproduction for the year to a 0.5% drop, or 18.83 Tcf. But summergas demand for gas-fired generation is expected to get a boost fromhigher oil prices. “With crude oil prices now expected to be about20% higher than year-earlier levels this summer, a much smallerpropensity for power generators to substitute oil for other fuels(including gas) this summer is anticipated than was the case 2months ago,” EIA said.

EIA’s latest estimates indicate gas demand was up by about 220Bcf (3.2%) in 1Q99 compared to the same period in 1998. EIA expectstotal gas demand to increasing by about 610 Bcf (2.9%) this year.Much of the annual increase is expected to occur in the fourthquarter.

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