EIA Sees Continued Pressure on Spot Market

Only sharply higher-than-expected production performance or a sharper-than-anticipated downturn in industrial activity this year will prevent continued pressure on natural gas spot prices in the $4-$5 range, according to the Energy Information Administration's Short-Term Energy Outlook for April 2001.

EIA found that because underground storage levels reached the "lowest levels recorded" at the end of the heating season March 31, "this development has set the stage for continued high spot and wellhead prices that will be sensitive to variations in summer weather conditions that would lead to high electricity demand and competition for gas needed for storage injections."

Gas demand also will be heightened by expectations for less available hydroelectric and nuclear power this summer. EIA predicts that hydro power levels are "likely to fall below levels seen during the summer of 2000" because of low winter precipitation rates and the "intrusion" of maintenance. "We expect, for example, that hydroelectric output in the Pacific Census Division (California, Oregon and Washington) will be about 8% below 2000 levels during the summer."

Electricity demand this summer will "exhibit somewhat slower growth than that seen last summer," reports EIA, "partly because of the likelihood that cooling degree-days will be marginally lower this year, but more important, because a dramatically lower rate of growth in the economy is anticipated." EIA predicts that year-to-year growth in real gross domestic production for the summer will be 1.5%, down from last year's summer, which exceeded 5.5%.

The problem, however, is a Catch 22. No growth would be good for electricity demand, but bad for the economy. "Any growth at all may strain power resources that are already near the limit, and the Pacific Region of the United States is a prime example of where this is an issue." Nowhere would this be more of a problem than California, where EIA reports "the fact that California has already experienced blackouts in 2001 does not bode well for the chances of getting through the summer without serious power supply problems. In California, summer (Q3) electricity demand typically exceeds winter (Q1) electricity demand by about 18%."

Following the "strong 4.9% performance in 2000," EIA estimates U.S. gas demand to grow at a rate of about 1.9% this year, attributing the drop to a slowing economy and "less rapid demand growth in the industrial and commercial sectors." Growth next year will heat up to about 3.4% as the economy again gains steam and new gas-fired power generation requirements escalate.

As production responds to the high rates of drilling over the past year, domestic gas production through next year also is expected to rise, said EIA. After rising 3.7% in 2000, production will increase by 2.7% this year and 2.5% in 2002.

Net imports of natural gas also will grow about 13% this year and another 4% in 2002. "For this winter, we estimated that net imports were 11% higher than last winter's imports. For this summer, we project that natural gas imports will be 17% above last summer's as demand for storage refill is expected to be high."

EIA's report, which also provides information on the short-term outlook for U.S. and international crude oil and gasoline availability, may be found on its web site at www.eia.doe.gov/steo/steo.html.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.