EIA Expects Highest Average Wellhead Prices Since 1985

The U.S. Department of Energy's Energy Information Administration said on Friday it is expecting the highest average gas wellhead prices (nominal) in history this year and the highest prices in real (inflation adjusted) terms since 1985.

"We are projecting that natural gas [average wellhead] prices will increase by 50% this summer (April-September) compared to last summer and by 60% this winter (October-March) compared to last winter. Naturally, higher end-use prices will result from higher projected wellhead prices. The wellhead price for the year is projected to average over $3/Mcf," EIA said in its July Short-Term Energy Outlook.

"Unless demonstrable improvements in North American gas production materialize soon, a break in gas wellhead prices from the current $4.00-$4.50/Mcf range may not develop until next spring."

Natural gas prices are expected to remain high on the strength of increasing demand, primarily from the electric power generation sector, and its impact on already low gas storage levels. The EIA also is looking for a return to normal weather this winter, which will mean sharply higher heating demand than last winter.

The injection rate for gas into storage continues to be "too sluggish to comfort the market for next winter's heating season," EIA said. It estimates underground working gas storage levels are currently about 18% below year-ago levels (22% according to American Gas Association statistics). "Using a five-year (1995 to 1999) average for working gas levels at the end of June, we estimate the current storage "deficit" to be only about 140 Bcf, not really outside of the normal range. Still, with current and expected demand growing strongly, even a small deficit relative to historical averages can have significant implications for market prices." Working gas in all Canadian storage facilities increased to 45.2% of capacity as of June 23 compared with 56.8% full a year ago, EIA noted.

"At current injection rates, the availability of natural gas for next winter has become chancy, as seen in the buoyancy and levels of today's prices," the agency said. "Hot summer weather in portions of the country that consume large amounts of gas-generated electricity has also contributed to the low storage injection rate. Natural gas that would normally be injected into storage has, to some extent, been used (indirectly through electric utilities) to run air conditioners."

EIA expects increasing imports from Canada to make up some of the lost ground in the fall. "The ability of the domestic industry to push gas storage to comfortable levels by the beginning of autumn remains in question at this time. However, we have revised expected gas net imports upward for late fall and into 2001 under the assumption that the current price regime will generate greater success by Canadian suppliers in filling new export capacity on the Alliance pipelines."

The effects of increased drilling for gas in the U.S. probably won't appear in the form of increased production until after the next heating season, EIA said.

Meanwhile, the strong economy and boom in gas-fired power generation is expected to continue increasing gas demand. Electricity demand so far this year has risen by about 4% compared to 1999 levels, EIA said, noting there also has been a fear factor associated with potential reliability problems in the West and Northeast.

Natural gas for power generation is projected to yield its apparent average price advantage over residual fuel oil by the fourth quarter of this year. Stocks of high-sulfur distillate fuel oil (heating oil) particularly in the Northeast are currently at extremely low levels. There is a "potential for a repeat of last winter's home heating oil price shock," EIA said. "A rapid stock build, which is likely once the driving season ends, and higher levels of imports of distillate fuel would make the high price scenario less probable. A mild winter in the Northeast would also ease the pressure." Fuel oil is also projected to be the cheaper of the two fuels for most of the year 2001, according to EIA.

The forecast for overall gas demand in 2000 and 2001 has been revised upward from the levels EIA previously forecasted in June. "This is primarily due to an upward revision in projected rates of growth in commercial and industrial activity in the United States. We now expect about 5% growth in U.S. GDP in 2000 compared to about 4% in our previous projections. This shift yields a 4.3% annual growth rate in 2000 for gas demand compared to 3.4% projected last month."

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