Energy consumers are in for a tough winter heating season with sharply higher prices for all energy commodities compared to last winter, the Energy Information Administration (EIA) said last week. Two forecasts released by EIA on Wednesday — a day when heating oil reached a record high, crude oil remained over $52/bbl and natural gas was still more than $7/MMBtu — predict that higher prices will remain the norm over the short term.

“Consumers will…be feeling the pinch” this winter, Guy Caruso, administrator of the EIA, said during a hearing by a subcommittee of the Senate Commerce Committee on Wednesday following the release of EIA’s “Winter Fuels Outlook: 2004-2005.”

In the Winter Fuels Outlook, EIA projects winter season gas demand will be up 1.5% compared to last winter to 70.45 Bcf/d because of greater heating degree days expected in key regions and continued demand increases in the commercial and power generation sectors. Residential gas consumption in the Midwest is expected to be up 3.7% this winter and residential gas prices are forecast to be 11.2% higher than last winter. Wellhead gas prices are expected to be up 23%.

Meanwhile, domestic dry gas production is expected to be up only 0.6% to 52.28 Bcf/d. “This increase is somewhat less than would have been expected had Hurricane Ivan not disrupted Gulf of Mexico production,” the agency said in its report. Caruso noted that Ivan had a “considerable impact” on both supply and prices.

Shut-ins currently stand at 1.7 Bcf/d of gas and 475,176 bbl/d of oil, according to the latest report from the Minerals Management Service (MMS). On Friday, MMS reported that nine platforms and one rig remained evacuated. Cumulative production deferrals since Sept. 11 total 74.1 Bcf of gas and 17 million bbl of oil.

That lost production has forced forecasters to scale back their optimistic projections on season-ending gas storage levels. Nevertheless, gas inventories already are above the high end of the normal range and are expected to remain above normal. “Given continued net injections during October, working gas inventories by Oct. 31 are expected to be at their highest since 1990,” EIA said.

That may put some near-term downward pressure on prices, according to some analysts. If the weather remains mild and Gulf production continues to comes back, by the time bidweek arrives in the cash market “it is going to be really hard to find places to put gas and that is going to put downward pressure on the physical market and that should pull down the forward market,” said Ron Denhardt, a consultant with Strategic Energy and Economic Research Inc.

Despite 2.3 Bcf/d of Gulf of Mexico gas production remaining shut in during the week ending Oct. 1 due to damage from Hurricane Ivan, working gas levels in storage still managed to rise 81 Bcf, which was more than most market observers had expected. The EIA estimates that on Oct. 1 working gas levels rose to 3,092 Bcf, or 200 Bcf more than the five-year average and 188 Bcf more than the same time last year. The large and unexpected refill shows that weak market conditions more than offset the Gulf shut ins during the week.

Working gas levels in the Producing region are the highest that they have ever been at this point in the injection season since weekly storage data was first compiled in 1994. Producing region working gas rose 15 Bcf in the latest report to 882 Bcf. The 10-year average of season ending storage levels in the Producing region is only 811 Bcf. Working gas levels in the West also are already above the 10-year average for season-ending storage levels.

“Based on current balances (and simply assuming the 6 Bcf/d 10-year historical going forward injection rate from current levels), storage supplies would approximate a substantial 3,273 Bcf by Nov. 1,” said UBS analyst Ronald J. Barone. “This compares with 3,155 Bcf at that time in 2003; 3,145 Bcf in 2002; 3,152 Bcf in 2001; the overall 10-year average of 3,023 Bcf; and the all-time record high of 3,254 Bcf set during the week ending Nov. 30, 2001.”

Canadian Enerdata is reporting that working gas levels north of the border also are very high: nearly 100% full in the East region at 269 Bcf; 91% full in the West at 212 Bcf; and 93% full nationwide with 483 Bcf. Canadian storage “is probably at least 100 Bcf higher than last year,” said Denhardt. “Only about half of it is actually reported by Enerdata. There’s a lot of storage that’s not covered in the survey so there’s probably about twice as much in storage as Enerdata reports. In total, it’s at least 100 Bcf higher than last year.”

However, the market direction for this winter is far from certain, Denhardt noted. “Views have changed a lot about weather during the heating season. A month or two ago, people were talking about a weak El Nino and possibly a warmer than normal winter, but now [the National Oceanic and Atmospheric Administration] has changed that to colder than normal in the Mid Atlantic and South regions, and a lot of areas, including the Northeast could go either way. Warmer than normal weather is forecast for most of the West except the souther Rockies (see related story).

“If we get normal or colder than normal weather this winter with extremely high oil prices, I think we could have very high winter prices,” he said. “There’s near-term pressure to bring things down, but this winter we could have some pretty tough going.”

He noted that natural gas prices last winter were about 30 cents less than West Texas Intermediate crude oil prices on a per MMBtu basis, and the gas market is even tighter this year. With $50/bbl oil this winter, that puts natural gas about $8.32/MMBtu. “I’m not saying it will get to $8.32. I would expect oil prices to come down some,” said Denhardt. “I think we have been trading a lot on fear and speculation and hedge funds just having a place to put their money.

“The problem is that gas prices can pretty much go anywhere between resid and distillate and not make much difference in terms of demand, so if oil prices hold the market can drive gas prices up pretty close to distillate and it won’t matter that much from a demand perspective. It’s possible we’ll hit those kinds of price levels.”

Despite high storage levels, EIA still expects spot prices to “rise significantly once the heating season gets under way.” EIA noted that spot and futures prices increased sharply in the latter half of September in response to gas production losses caused by Ivan. The average spot price for natural gas at the Henry Hub for the month of September was $5.15/Mcf, EIA said. Henry Hub futures were still higher than $7 on Friday.

The agency raised its gas price forecasts for 2004 and 2005 in its latest “Short Term Energy Outlook” (STEO) mainly in response to the lingering impact on production from Ivan. The agency now expects Henry Hub spot prices to average $6.10/Mcf in 2004 and $6.18/Mcf in 2005. That compares with projections of $5.96/Mcf and $6.14/Mcf in last month’s STEO.

EIA lowered its forecast for domestic dry gas production for the entire year to 18.87 Tcf from 18.99 Tcf in last month’s STEO. It said dry gas production last year was 19.07 Tcf.

“With continuing high rates of drilling for natural gas in North America, 2005 domestic production is projected to grow by 1.5%,” EIA said. “Steady, if modest, increases in liquefied natural gas (LNG) imports, restrained export growth, and carryover from the robust storage levels noted above are expected to contribute to moderate improvement in the supply picture through 2005.”

EIA expects 840 Bcf of LNG to be imported next year, 25% more than what is projected for 2004, while domestic dry gas production is expected to grow slightly to 19.15 Tcf in 2005. Pipeline imports, mostly Canadian gas, are expected to fall this year to 3.46 Tcf and again next year to 3.34 Tcf from 3.49 Tcf in 2003.

Gas consumption is expected to be flat this year at 21.93 Tcf and grow next year to 22.50 Tcf mainly because of growth in demand from the power generation and industrial sectors.

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