Given the double-barreled demand for natural gas by power generators and storage, spot gas prices will average an “unseasonably strong” $4.65/Mcf during this spring and summer, and $5/Mcf for the entire year, according to the Energy Information Administration (EIA) last week. This compares to projections by Dynegy Marketing and Trade and PanCanadian Energy Services of $3.50/Mcf to $5.50/Mcf for the remainder of the year.

In its Short-Term Energy Outlook for May issued last week, the Department of Energy (DOE) agency plotted three scenarios (low, base and high) for spot prices through the end of 2002. It projected that gas prices, which were at $5.25 in April, will drop to a low of about $4.25 in the June-July period, and then will begin steadily climbing until November of this year (hitting a $5.50-$7 range) and will hover at that level until January 2002. Afterward, it projects spot gas prices will go into a free-fall until July 2002 (reaching $3.50-$5), and then will start to rise again to about $5-$6.50 by November 2002.

Spot gas prices in California are likely to be even higher, given the “significant volatility” that the market has exhibited compared to the rest of the nation, the EIA said in its report. “In April, average spot prices into Southern California averaged about $13.30 million/Btu, approximately 2.5 times [the] average prices seen in the South, Midwest and East, and about 50% above spot prices into the northern part of the state.”

A key factor that “should keep prices relatively high [this spring and summer] is the need for unusually large refill for underground storage,” the EIA said. As a result, “the gas supply situation this injection season bears close monitoring. If the spring and summer weather is particularly 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 again be strained, resulting once more in sharply rising prices from already robust current levels.”

The pace of recent storage injections has been particularly strong, with the EIA estimating working gas in storage at the end of April at 932 Bcf. “Compared to this time last year, storage levels are still low,” it said, but they have improved significantly in recent weeks. The agency anticipates a steady pace of injections to be maintained through the start of the next heating season (November 2001), at which point it projects that the amount of working gas in storage will be about 5% below the prior year’s five-year average.

The EIA expects overall gas consumption to grow at a paltry 1.9% this year due to a slowing economy and stunted demand growth in the industrial and commercial sectors. This is considerably below the 4.9% increase in U.S. gas consumption that was seen in 2000, the agency noted. Gas production is projected to rise by 2.7% this year and by 2.5% in 2002, compared to a 3.7% gain in 2000.

On the electricity side, the EIA continues to paint a bleak price and supply picture for California this summer. Spot electricity prices in the California-Oregon Border (COB) market have been running about four times higher than the spot prices seen in the East Coast PJM market, and prices in the Palo Verde market also are well above spot prices elsewhere in the nation, it said.

The higher electricity prices are closely linked to gas prices in California. In an attempt to tame the escalating power prices, some generators are turning to heavy fuel oil and coal to fuel their facilities “in lieu of expensive or unavailable natural gas,” the EIA noted.

“Reserve margins remain quite slim in the California system as a whole and unplanned outages there remain high.” The California Independent System Operator (Cal-ISO) reported that 12,155 MWs, or about 26% of system capacity, was offline in late April, with the majority (58%) of it due to unplanned outages, according to EIA. Even though the state has 2,000 MWs of new capacity coming online this summer, the Cal-ISO projects at peak demand it will be short 700-3,600 MWs between June and September.

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