EIA Expects Highest Average Wellhead Prices Since 1985
The Department of Energy's Energy Information Administration
said on Friday it is expecting the highest average gas wellhead
prices (nominal) in history this year and the highest prices in
real (inflation-adjusted) terms since 1985.
"We are projecting that natural gas [average wellhead] prices
will increase by 50% this summer (April-September) compared to last
summer and by 60% this winter (October-March) compared to last
winter. Naturally, higher end-use prices will result from higher
projected wellhead prices. The wellhead price for the year is
projected to average over $3/Mcf," EIA said in its July Short-Term
"Unless demonstrable improvements in North American gas
production materialize soon, a break in gas wellhead prices from
the current $4.00-$4.50/Mcf range may not develop until next
Natural gas prices are expected to remain high on the strength
of increasing demand, primarily from the electric power generation
sector, and its impact on already low gas storage levels. The EIA
also is looking for a return to normal weather this winter, which
will mean sharply higher heating demand than what occurred last
The injection rate for gas into storage continues to be "too
sluggish to comfort the market for next winter's heating season,"
EIA said. It estimates underground working gas storage levels are
currently about 18% below year-ago levels (22% according to
American Gas Association statistics). "Using a five-year (1995 to
1999) average for working gas levels at the end of June, we
estimate the current storage 'deficit' to be only about 140 Bcf,
not really outside of the normal range. Still, with current and
expected demand growing strongly, even a small deficit relative to
historical averages can have significant implications for market
prices." Working gas in all Canadian storage facilities increased
to 45.2% of capacity as of June 23 compared with 56.8% full a year
ago, EIA noted.
"At current injection rates, the availability of natural gas for
next winter has become chancy, as seen in the buoyancy and levels
of today's prices," the agency said. "Hot summer weather in
portions of the country that consume large amounts of gas-generated
electricity has also contributed to the low storage injection rate.
Natural gas that would normally be injected into storage has, to
some extent, been used (indirectly through electric utilities) to
run air conditioners."
EIA expects increasing imports from Canada to make up some of
the lost ground in the fall. "The ability of the domestic industry
to push gas storage to comfortable levels by the beginning of
autumn remains in question at this time. However, we have revised
expected gas net imports upward for late fall and into 2001 under
the assumption that the current price regime will generate greater
success by Canadian suppliers in filling new export capacity on the
The effects of increased drilling for gas in the U.S. probably
won't appear in the form of increased production until after the
next heating season, EIA said.
Meanwhile, the strong economy and boom in gas-fired power
generation is expected to continue increasing gas demand.
Electricity demand so far this year has risen by about 4% compared
to 1999 levels, EIA said, noting there also has been a fear factor
associated with potential reliability problems in the West and
Natural gas for power generation is projected to yield its
apparent average price advantage over residual fuel oil by the
fourth quarter of this year. Stocks of high-sulfur distillate fuel
oil (heating oil) particularly in the Northeast are currently at
extremely low levels. There is a "potential for a repeat of last
winter's home heating oil price shock," EIA said. "A rapid stock
build, which is likely once the driving season ends, and higher
levels of imports of distillate fuel would make the high price
scenario less probable. A mild winter in the Northeast would also
ease the pressure." Fuel oil is also projected to be the cheaper of
the two fuels for most of the year 2001, according to EIA.
The forecast for overall gas demand in 2000 and 2001 has been
revised upward from the levels EIA previously forecasted in June.
"This is primarily due to an upward revision in projected rates of
growth in commercial and industrial activity in the United States.
We now expect about 5% growth in U.S. GDP in 2000 compared to about
4% in our previous projections. This shift yields a 4.3% annual
growth rate in 2000 for gas demand compared to 3.4% projected last
Is OPEC to Blame for Natural Gas Price Spikes?
Despite strong demand and soaring crude prices, EIA places most
of the blame for the current high gas price situation on tight
supply. "Although rising crude oil prices have encouraged natural
gas prices to advance, the primary cause of these elevated gas
prices has been the delicate supply situation," EIA said.
However, in a new report released last week, ICF Consulting said
it's not so sure about that. "Extreme weather, storage levels,
short-term deliverability, and crude oil prices also have
contributed significantly, but high oil prices are the big driver,"
said ICF Vice President Robert E. Baron.
"Today's conventional wisdom holds that crude oil prices no
longer have significant influence on natural gas prices. But, this
'de-coupling' appears to have been reversed, at least for the time
being," said Michael L. Godec, managing director of ICF's oil and
gas practice. "Oil and gas prices de-couple when excess gas supply
exists and oil prices are low. In such instances, the gas market is
driven by gas-on-gas competition, and gas prices at the burnertip
fall below parity with petroleum prices. But today, the situation
is the opposite; oil prices are high and gas supplies are tight. As
a result, oil and gas prices at the burnertip are near parity and
have again become coupled."
Using proprietary gas resource and market assessment models, ICF
simulated the market over the past two years and evaluated the
factors that could affect prices. The findings are part of the
company's North American Gas Market Outlook 2000, an annual review
of supply and demand and the other events driving the gas market.
"There's more oil-fired generation capacity out there than most
people give the market credit for," said Godec. "We also haven't
had oil prices this high in a long time. The de-coupling of oil and
gas prices occurred because oil prices were maintaining such low
"There's also the concern that we have not seen the increase in
deliverability that would be commensurate with higher prices, and
there's a psychological factor associated with [this].
Deliverability is down. I still don't think we've worked ourselves
completely out of the impact of the low-price world that we lived
in a year to a year-and-a-half ago," he said, echoing EIA's
remarks. "We're only beginning to see the increase in
deliverability that is resulting from the increase in drilling. If
we wait another six months I think we'll see a pick up in
deliverability as new production comes on line as people go out and
drill more risky but more productive prospects. Our analysis
indicates that the supply is there at certain prices. Beginning in
the fall and certainly by next spring I think we'll start seeing a
turnaround. By next spring, I think will stabilize and prices will
be back down in the $2.50-$3 range."
For more information on the ICF Outlook contact Godec at
703-934-3869 or email@example.com . The ICF Outlook is
delivered as a 2 hour presentation at the client's office. Copies
of the presentation itself are left with the client for future
reference. The charge for the service is US$7,500 plus other direct
charges (travel, photocopying, telephone, etc.).