Expected rises in gas demand, a relatively slow storage buildup,strong crude oil prices and fears of a repeat of last summer’s heatwave in key gas-consuming areas will pave the way for unprecedentednatural gas prices for the rest of the year, the Energy InformationAdministration (EIA) said in its short-term energy outlook forJune.

Spot wellhead prices have been averaging more than $4 per Mcfsince late May, nearly doubling since the beginning of the year,the agency said. At the same time, futures gas prices for the next12 months are expected to be extremely lofty, averaging $4.20 perMMBtu amid market concerns that deliverability will be insufficientto meet gas demand, the EIA outlook noted.

It expects the price trend to continue throughout 2000. “We areprojecting that natural gas prices will increase by 50% this summer(April-September) compared to last summer, and by 60% this winter(October-March) compared to last winter.” The EIA said wellheadprices for the year will average more than $3 per Mcf, and will befollowed by a “slight easing” in 2001.

“Although rising crude oil prices have encouraged gas prices toclimb, by far the major determinant for these robust gas prices hasbeen the fragile supply situation. Simply put, the injection ratefor gas into storage has been too slow to comfort the market fornext winter’s heating season,” it said.

The EIA has estimated underground working storage levels arecurrently about 20% below year-ago levels. “At present rates ofinjection the availability of gas for next winter has becomeuncertain, as reflected in the volatility and levels of currentprices.” A major cause for the depleted storage levels and therapid price runup has been the recent hot weather in regions thatconsume large amounts of gas-generated electricity. “Gas that wouldotherwise be injected into storage is now being used (indirectlythrough electric utilities) to run air conditioners.”

The EIA predicts the United States may face a short-term supplyconstraint. “Several years of relatively low prices have sloweddown exploration and drilling for new sources of supply. Recenthigher prices have caused drilling to rebound, but new supplies maynot begin to yield significant improvements in actual productionuntil after this summer.”

On the plus side for gas supply, it noted the U.S. rig count hit662 for the week ending May 26, its highest level since the countbegan in March 1987. Still, the American Gas Association said theU.S. working gas during the week ending May 19 was only 37% full,or 1,218 Bcf, which was 414 Bcf lower than a year ago. “Storageholders have been unable or unwilling under the current pricingconditions to make any significant additions to storage,” the EIAsaid. Canadian storage facilities aren’t faring much better,reporting that they were at 34% of capacity as of May 19, comparedto 44.9% a year ago.

Susan Parker

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