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EIA Braces U.S. for Sky-High Gas Prices This Winter

The Energy Information Administration in its first Short-Term Energy Outlook following Hurricane Katrina warned the natural gas industry and its customers to prepare for sky-high gas prices this winter.

Depending on the strength of the winter and the region of the country, increases in natural gas spot prices this year are poised to range between 37% and 50% above the 2004 averages under a medium-speed recovery case in the Gulf Coast, the statistical arm of the Department of Energy (DOE) said in its energy outlook for September, which was released last Wednesday. The EIA said city-gate prices and end-use prices are expected to experience double-digit percentage hikes for the second year in a row in most regions where heating demands are likely to increase the most, such as the central portion of the United States.

Assuming that a medium recovery case holds, the general expectation for increases in residential per-household expenditures for fuels this winter shapes up as follows: a 46% increase for natural gas to about $16.23/Mcf compared to $11.13/Mcf last winter, a 31% hike for heating oil, 17% increase in electricity; and a 40% hike for propane relative to last winter, the EIA said. Expenditure increases for natural gas are expected to be particularly strong (up 71% from last winter) in the East North Central region (Ohio, Indiana, Illinois, Michigan and Wisconsin) because of anticipated higher heating-related demand in comparison to the relatively mild conditions seen last year. It estimated that some customers could be paying as much as $19/Mcf or more this winter for natural gas.

"Because considerable uncertainty remains regarding the specific extent of Katrina's damage, it is difficult to provide a single forecast for the upcoming winter and subsequent months as we typically do in the monthly outlook. More detailed damage assessments should be forthcoming over the next several weeks, which should clarify our forecast," the EIA said.

In the latest outlook, the EIA offered three scenarios: 1) fast recovery, which assumes a very favorable set of circumstances for getting supplies back to normal; 2) slow recovery, which assumes that significant outages in oil and natural gas production and delivery from the Gulf area continue at least into November; and 3) medium recovery, which assumes a path between slow and fast recovery. In all cases, a return to normal operations, in terms of oil and natural gas production and distribution, is achieved or nearly achieved by December, the agency said.

Depending on the speed of recovery from supply losses in the Gulf of Mexico, the average price across the recovery cases for the fourth quarter is expected to range from $11/Mcf to $13/Mcf, up significantly from the agency's price forecast in August, the EIA estimated. It projects that the average price for natural gas on an annual basis will be $8.75/Mcf to $9.14/Mcf.

Henry Hub spot prices, which averaged more than $9/Mcf in August, are likely to average $8.82/Mcf for the entire year of 2005 and $8.42/Mcf next year in the medium recovery case, according to the EIA.

"The natural gas market is likely to stay tight over the next couple of months, particularly in light of the supply impacts from Katrina. Spot prices are expect to ease going into 2006 as the effects of Katrina fade. However, prices at the Henry Hub are likely to remain above $10/Mcf until peak winter demand is over," the agency said.

Working gas in storage was pegged at 2,633 Bcf for the week ended Aug. 26 following an injection of 58 Bcf. The EIA estimated that storage levels as of Aug. 26 were 1.9% lower than a year ago, but still 5.2% above the five-year average. For the week ended Sept. 2, the agency reported that industry injected 36 Bcf, bringing total working gas in storage to 2,669 Bcf, or 95 Bcf less than a year ago.

"Katrina is likely to reduce the peak storage achievable over the remainder of the injection season from what was expected previously," the EIA said. As it is, end-August storage was about 120 Bcf below last month's projection. Expected storage at the end of October is likely to be about 270 Bcf below the year-ago level and about 50 Bcf below the five-year average, it noted.

Natural gas demand fell by about 1.45 Bcf/d in the three Gulf coastal states ravaged in the days immediately following Hurricane Katrina, the EIA estimated. "Katrina-related natural gas demand reduction is, at most, estimated to be between 15 and 25% of the peak level [8.3 Bcf/d] of lost production, and, as service restoration proceeds, should become an increasingly minor factor."

The EIA projects that nationwide demand will fall slightly by 0.7% to 22.28 Tcf this year, but will recover by 2.4% to 22.81 Tcf in 2006. Domestic gas production is expected to drop by 1.5% this year due mainly to the major disruptions to infrastructure in the Gulf from both Ivan and Katrina. "Preliminary EIA data through June yield an apparent decrease in output of 1.5% for the first half of 2005 compared to the same period in 2004, as recovery from the disruption caused by Hurricane Ivan in 2004 was not yet complete."

Meanwhile, imports of liquefied natural gas (LNG) into the United States appear to have exhibited minimal year-over-year increases on average through the first half of this year, the EIA said. It expects total LNG imports for 2005 to be approximately 710 Bcf compared to 650 Bcf in 2004.

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