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EIA Sees Average Price of $4.73 in Face of Tight Supplies

EIA Sees Average Price of $4.73 in Face of Tight Supplies

Federal government prognosticators last week reported that demand for natural gas will slow considerably during 2001, but spot gas prices nevertheless are expected to remain lofty throughout much of the year in the face of tight gas inventories.

Gas consumption is projected to grow at a rate of only 2.3% (to 23.2 Tcf) this year, which is almost half of the 4.4% growth rate that was experienced in 2000, the Energy Information Administration (EIA) said in its short-term energy outlook for March. It attributed the forecasted drop to a sluggish economy and less rapid demand growth in the industrial and commercial gas sectors. But it expects a turnaround to occur in 2002, with gas demand rising by about 4.1% to 24.1 Tcf as the economy picks up again and gas consumption by power generators continues to grow.

The EIA's prediction for strong gas prices in 2001 is closely linked to the current low storage levels. Even if only modest gas withdrawals from storage occur this month, "we are still likely to end the heating season with the total level of gas in storage below the previous low recorded by EIA," the Department of Energy (DOE) agency said. This precarious storage situation, which is expected to stay with the industry for much of the year, will keep spot prices well above the $4 mark during 2001, the EIA noted.

"In our view, only a spectacular performance from the U.S. and Canadian gas industry in terms of increased production or an extremely mild summer this year would generate much in the way of additional reductions in natural gas prices beyond what has already happened since mid-winter."

The EIA projects the industry will end the winter heating season (March 31) with approximately 689 Bcf of gas in storage, which is 38% below the previous five-year average. It estimates the industry will have to inject 2.31 Tcf between April and October in order to have an average 3 Tcf of working gas in storage at the start of the next winter heating season. That means about 500 Bcf more gas will have to be injected over the year to meet the pre-season level for working gas. "We think that only about 60% of the extra 500 Bcf is likely during the injection season, so that a 200 Bcf deficit relative to the five-year average is likely" by the end of next October, the EIA predicts.

Consequently, "average monthly gas spot prices below $4/Mcf between now and next winter are possible but do not seem very likely under these circumstances," according to the EIA. It anticipates that the average spot prices will begin to dip after the close of the winter season on March 31, but then will begin to rise to meet the expanding gas demand of power generators this summer.

"If the summer weather is exceedingly hot in regions that consume large quantities of gas-fired electricity (California and Texas, for example), then injections into underground storage for the next winter would be strained and prices could start rising more sharply and sooner than expected," the agency said. "In 2001, the annual average [spot] price is projected to be about $4.73/Mcf. Next year, we expect the storage situation to improve modestly and with that, a decrease in the average annual [spot] price."

Even though its foresees some easing of the storage situation next year, the EIA noted that gas prices will continue to be affected by "rising production costs and capacity constraints on the pipelines." The high costs and tight supply of natural gas are forcing some power generators to turn more to coal and fuel oil for their facilities.

Although gas prices in the California energy market have eased up somewhat since December, the agency said it sees no immediate end to the gas supply and deliverability problems that have been plaguing power generators and other gas customers there. "The situation in California is characterized by low gas storage, gas pipeline bottlenecks, high demand and low hydropower. These supply problems are following on last summer's supply problems with no obvious end visible over the next two years."

The agency projects an increase in domestic production in 2001, but it will be measured growth. It reported that production rose by 3.1% in 2000, and will likely increase by 3.3% this year and by 2.5% in 2002. Rounding out the supply picture, it said net imports of natural gas (mostly from western Canada) are projected to grow by about 15% in 2001 and by another 4% in 2002.

Susan Parker

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