The Energy Information Administration said in its SeptemberShort Term Energy Outlook it is projecting natural gas prices atthe wellhead will increase by about 87% this winter (October-March)compared to last winter. Residential prices for gas are expected torise on average by 27% compared to last year. For the entire year,the average wellhead price for natural gas is projected to be$3.40/Mcf, the highest annual wellhead price on record (ininflation-adjusted terms, it would be the highest annual averageprice since 1985).

The short-term supply constraints that are currently hinderingthe industry’s ability to meet storage and power generation demandare likely to continue into the heating season, EIA said. Storagelevels could end up being about 8% below the five-year average ofabout 3,000 Bcf by the start of winter if net injections continueat 10% below historically average rates through the remainder ofthe refill season.

The effects of increased drilling for gas are not expected toappear in the form of significantly increased production untilafter the next heating season, according to the agency’s report.

“For now, we are continuing to maintain a conservative view ofpossible increases in domestic gas production for 2000 and 2001,with assumed increases of 0.5% and 1%, respectively, for this yearand next…,” the EIA report stated. “On the other hand, the U.S.natural gas rig count on Aug. 25 was at a recent high of 794 rigs.Exploration and production budgets for many natural gas producersare expected to increase sharply in 2000 and 2001, spurred byhigher prices and greatly improved current and expected revenuesfrom producing assets. Also on the positive side, data from theTexas Railroad Commission suggest that, through May, year 2000 gasproduction increased, if only slightly (0.4%). This signifies aturnaround (however modest) in a key producing region. Very highgas drilling rates, including a record-setting pace in deepoffshore Gulf of Mexico, confirm that increasingly positive resultsfor domestic gas production are under way.”

Imports are projected to rise by about 12% next year primarilybecause of the 1.35 Bcf/d Alliance Pipeline coming on line nextmonth.

Meanwhile the demand outlook remains bullish at 4.2% annualgrowth. In 2001, however, the forecast has been revised downward to2.5% growth because of higher than expected natural gas prices. Theindustrial sector is the leading sector for demand increases in2000 at 9.3%, while electric utility demand is expected to declineby 4.0% primarily because of power plant sales. For the powergeneration sector as a whole, gas demand is expected to grow 6.5%this year and 1.5% in 2001. EIA said the reduced growth rate nextyear is largely due to the reversal in relative prices of fuel oiland natural gas, which began in August, with fuel oil gaining theprice advantage as gas prices continued to rise.

Gas demand this winter is expected to be up by 5.7% compared tolast winter if weather is normal. Normal weather implies a 12% risein heating degree-days compared with last winter.

Rocco Canonica

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