EIA: Supply Concerns Persist, Demand Strong
The Energy Information Administration warned last week in its
Short Term Energy Outlook that recent natural gas market activity
"reveals the backdrop of vulnerability.....to potential supply
shortfalls," particularly in light of increasing demand from the
power sector and the winter heating season approaching.
The agency noted the recent resurgence in spot and futures
prices "illustrates continued volatility amidst uncertainty
regarding North American supply adequacy, demand potential and even
potential hurricane damage." Sharply higher gas drilling activity
should improve supply, "but apparent performance so far in 2000
curtails optimism about significant improvements before the onset
of the heating season."
EIA said the storage injection rate continues to be "too gradual
to calm the market for next winter's heating season." Storage
levels are currently about 18% below year-ago levels, according to
EIA. Hot weather, particularly in Texas and California, has
contributed to the low storage injection rate, the agency noted.
"Natural gas that would normally be added to storage has, to some
extent, been used (indirectly through electric utilities) to run
air conditioners. Furthermore, demand for natural gas has been
growing due to the expanding economy over the last 7-8 years and
the widening role of gas generation at power facilities."
EIA expects gas storage levels to end the injection season 7%
below last year's level. "It should be noted," EIA said, "that it
is not so much the absolute level of inventories that are of
concern (we expect gas storage to be within a few percentage points
of the 1995-1999 average at the beginning of the upcoming heating
season). Given the strong propensity for incremental power demand
to be met by gas-fired units (particularly if hydroelectric power
continues to decline and nuclear power output does not grow
significantly), and given a strong likelihood that heating demand
will be up sharply this winter, expected demand relative to
anticipated storage levels may be the highest it has been in many
years. The impact of this situation on prices is, we think,
strengthened by the lack of significant domestic production
increases yet this year."
EIA expects gas demand to grow 4.3% in 2000 and 3.2% in 2001.
The industrial sector is leading the charge with an expected gain
of 9.9% this year, while electric utility demand is expected to
decline by 5.2%. "This dichotomy is due in part to sales of
electric generating plants by electric utilities to unregulated
generating companies, fuel consumption by which is recorded by EIA
in the industrial sector." For the power generation sector as a
whole, gas demand is expected to post 4.6% growth in 2000.
Noting recent increases in drilling and E&P spending, EIA
said it is maintaining a "conservative view of possible increases
in domestic gas production for 2000 and 2001, with assumed
increases of 0.5% and 1.0%, respectively, for this year and next."
The U.S. gas rig count on Aug. 4 was at a recent high of 772 rigs.
"Still, given that gas-directed drilling in the United States has
exceeded 600 rigs since late last October (compared to the low
point of 362 reached in late April 1999) and has exhibited 20% to
70% year-over-year increases since that time with little evidence
of rapidly improving production performance through the first half
of 2000, expectations of strong increases in U.S. production before
the end of this year are probably optimistic if not entirely
Net imports, however, are projected to rise by 12% in 2001, EIA
noted. Alliance pipeline will add 1.35 Bcf/d of new import
capacity, which is expected to be expanded to 1.83 Bcf/d.
EIA is projecting that gas prices at the wellhead will increase
by about 55% this winter compared to last winter, and it forecasts
wellhead prices will average $3.09/Mcf this year, which would be
the highest annual wellhead price (nominal) since 1985.
Total annual electricity demand for 2000 and 2001 has been
revised somewhat compared with EIA's July Outlook. Total
electricity demand in 1999 has been revised upward slightly, while
2000 demand expectations have been revised downward slightly due to
the generally cooler than normal summer temperatures overall,
despite periods of high temperatures in the south and west. Annual
electricity demand growth is now projected to be 2.1% in 2000 and
2.45% in 2001.
This summer's cooling degree-days are expected to be 4.6% below
last summer's. In July, overall CDD were 10% below normal and 22%
below July 1999. "Still, underlying demand remains strong and
shortages cannot be ruled out in some areas, particularly if August
turns out to be a hot month. Major concerns for utilities are the
possibility of severely spiking power prices and transmission
equipment failure during hot spells."