EIA: Gas Vulnerable to Winter Price Shocks
Due to low inventory levels, natural gas and heating oil will be
the most vulnerable of all home heating fuels to potential price
shocks this winter if the weather should turn colder than normal,
according to the Energy Information Administration's (EIA) latest
Short-Term Energy Outlook.
Natural gas wellhead and spot prices for this winter are likely
to be nearly double those of a year ago, leading to an almost 30%
hike in delivered gas costs for residential and commercial
customers; up to an 80% increase for electric utilities and as much
as 66% upswing for industrial users, the Department of Energy (DOE)
agency said. The agency noted, however, that in real,
adjusted-for-inflation terms, natural gas prices are lower than
they were in the early 1980s, before deregulation.
Assuming a normal (cold) winter, the EIA projects the average
winter wellhead price will be $4.48/Mcf, and that spot prices
(which have been hovering around $5/Mcf) will maintain much of
their strength. As a result, prices paid by residential consumers
in the Midwest this winter will rise on average by nearly 30% to
$8.58/Mcf compared to an average of $6.61/Mcf last winter, making
this the largest percentage increase of all heating fuels used by
the residential sector. Expenditures by Midwest households for
natural gas this winter will increase even more sharply --- 44% ---
to $780 from $540 last winter, said the agency report, which also
includes its "Winter Fuels Outlook: 2000-2001."
However, given that natural gas and heating oil are starting out
the winter season with inventories at sub-par levels, the EIA said
it sees an "enhanced risk of significant upward price shocks" in
the event heating degree-days are 10% colder than normal this
winter. Under such a scenario, natural gas prices could spike 10.5%
above their predicted base levels for residential customers, while
distillate fuel oil prices could jump an additional 30%, it noted.
For 2000, wellhead prices are expected to average $3.40/Mcf,
which in nominal terms would make it the highest annual wellhead
price on record, the DOE agency said. In real inflation-adjusted
terms, it represents the highest annual average wellhead price
The EIA anticipates the high wellhead prices will moderate
slightly in 2001 to $4.39/Mcf during the first quarter and
$3.59/Mcf in the second period.
A number of factors are converging to cause the higher prices
this winter heating season (October to March): a downswing in gas
production in past years, high demand under normal weather
assumptions, below-normal gas storage levels, high crude oil
prices, and tight alternative fuel (oil) markets, the EIA reported.
Concerns are particularly acute about storage levels, which it says
was about 8% below the five-year average of about 3 Tcf at the
start of winter.
As a result of these market influences, "retail energy fuel
costs --- already quite high by recent historical standards ---
will remain high amid tight supply conditions, posing increased
risks of short-term price spikes similar to those of the previous
winter. In contrast to the 1999-2000 winter season, natural gas
households are likely to see the largest year-over-year percentage
increases in fuel bills of any heating fuel," the EIA said in its
Demand this winter is projected to average 71.2 Bcf/d, up 4.1
Bcf/d (6.1%) over last year; residential and commercial customers
are expected to absorb half of that if the winter weather is
normal. Because production will only contribute 51.8 Bcf/d to meet
the overall consumption level, storage is expected to play a
pivotal role this winter --- especially in East Coast markets, the
EIA said. Working gas storage at the start of the heating season
(Oct. 1) was estimated at 2.53 Tcf, or about 227 Bcf below the
five-year average, it noted.
The shortfall between demand and production this winter will be
made up from storage withdrawals, about 9.2 Bcf/d, and imports of
10.23 Bcf/d, the EIA said.
"At current injection rates, it is becoming increasingly
uncertain whether or not ready supplies of gas will be available
during the heating season in sufficient quantities to avoid sharp
upward price pressure if winter weather turns out to be very cold,"
according to the EIA outlook.
Moreover, the agency said it wasn't counting on the new Alliance
Pipeline from Canada to be of much help in easing the U.S. supply
crunch this winter. "Assuming that it will take several months
before Alliance reaches its full capacity of 1.3 Bcf/d, that
pipeline may not fully contribute to advancing new gas supplies
until the heating season is nearly over. Even if Alliance is near
capacity at mid-winter, it is likely that a substantial portion of
the volumes contracted for delivery on the system will have been
de-contracted from other systems, particularly TransCanada Pipeline
System. Thus, it is an important question as to just how
significant Alliance will be with respect to net new supply from
Overall, natural gas demand is expected to average about 5.74
Tcf for the fourth quarter, and rise to 7.22 Tcf in the first
quarter of 2001, according to the EIA. It estimates that gas will
finish out 2000 with a demand rate of about 22.2 Tcf, up 4% from
21.36 Tcf a year ago.