EIA: Production Up, Prices To Stay Above $4
Natural gas production is on the upswing, according to Energy
Information Administration's November Short Term Energy Outlook.
The agency said the "torrid pace" of gas drilling activity in North
America is starting to pay off. As a result, wellhead gas prices
should ease further away from the $5/Mcf level through 2001 than
previously projected. Prices this winter, however, should stay
With the U.S. natural gas rig count at a high of 845 as of Nov.
3, EIA has increased its estimate for production growth in 2001 to
about 350 Bcf (1.9%) from its earlier forecast of 240 Bcf (1.3%).
The agency continues to predict gas production will grow by 0.7%
Net imports of gas are expected to rise by 12% in 2001,
coinciding with the installation of the new 1.325 Bcf/d Alliance
pipeline. The pipeline which travels from western Canada to the
U.S. Midwest has experienced numerous start-up delays, most
recently being pushed back to late November (see related story this
issue). EIA is unsure of what Alliance's impact on supply will be,
mainly because much of the contracted volumes are likely to come
off of other Canadian lines particularly the TransCanada system.
"Although high oil prices have contributed to the current
strength in gas prices, the predominant reason for these sustained
high gas prices was, and still is to some extent, perceptions about
the supply situation going into the winter," the agency said.
The agency expects November will be the true measuring stick for
gas supplies and prices over the rest of the winter heating season.
Underground working gas storage levels are currently about 8-9%
below year-ago levels, according to EIA. Historically the last
month in which gas is put into the ground, a cold November could
decrease injections and send spot prices over the $5.00 mark again.
However, if the weather turns unseasonably warm, "spot gas prices
would be expected to fall sharply." As always, the weather will be
the key factor determining the direction of the gas market this
winter, EIA noted.
"We are projecting that natural gas prices at the wellhead will
increase by about 90% this winter (October-March) compared to last
winter. Of course, higher end-use prices will result from higher
projected wellhead prices. If our base case projections hold,
residential prices for natural gas would be about 29% higher than
last year during that period. For the entire year 2000, the average
wellhead price for natural gas is projected to average $3.37/Mcf."
On the natural gas supply and demand front, EIA forecasts the
overall gas demand growth for 2000 will be 3.3%, down a little from
the agency's October prediction based on recent monthly data.
Likewise, natural gas demand growth is expected to slump in 2001 to
2.1% primarily reflecting higher gas prices relative to fuel oil
prices, EIA predicted.
For this winter, the study shows gas demand will be up 5.1% over
last year's winter demand levels, assuming normal weather which
implies an 11% rise in gas-weighted heating degree days over last
winter. For the residential and commercial sectors in the fourth
quarter, demand for natural gas is expected to rise between 10 and
11% over last year's numbers for the same time period due largely
to the forecast for a normal winter. In the Industrial sector,
demand is expected to increase by 6.4% in 2000. On the other hand,
EIA predicts electric utility gas demand will decline by 2.7% due
to the trend of utilities selling their plants to unregulated
generating companies which are classified as part of the industrial
sector. The agency expects gas demand among the industrial and
utility sectors to record flat or slightly declined growth for 2001
because it expects fuel oil will gain the price advantage over
"In the fourth quarter of 2000, previously falling demand for
oil-fired generation is expected to turn around relative to
gas-fired generation, as the price differential between fuels in
the electricity generating sector shift to favor oil, causing those
plants which can switch to oil to do so," stated EIA. "The
favorable price differential for oil relative to gas is expected to
continue through 2001."
Electricity demand growth is forecasted to be somewhat lower
than the October Outlook at 2.2% in 2000 and 0.9% in 2001. Based on
a normal winter, electricity sales by electric utilities are
expected to be up by 2.9% over last winter. Alex Steis