EIA Continues to Chart Downward Spiral For Gas Prices

Although certain pockets of the country that use large amounts of gas for power generation may see some increase in natural gas prices over the next couple of months, the overall likelihood of any significant summer jump in gas prices now seems remote, the Energy Information Administration (EIA) recently concluded. With natural gas storage injections hitting record highs in April through June, EIA sees average wellhead prices in the third quarter continuing on a downward slope, averaging $3.40/Mcf.

In its Short-Term Energy Outlook for July issued at the end of last week, the EIA noted that spot gas prices have fallen about $1 per million Btu to near $3 since mid-June. Continued high levels of new supply relative to demand requirements have led to much lower prices and a higher than previously anticipated storage build thus far this season. Contributing factors in these events have been the relatively mild weather in most of the United States and also lost demand in the industrial and utility sectors. Electric utility demand for natural gas is estimated to have fallen by an average of about 8.3% in the first six months of 2001 from year-ago levels, as electric utilities turned away from natural gas in favor of other fuels due to high prices. Industrial gas demand growth, which was generally flat or negative in the first four months of this year, began to turn around in May as gas prices fell and the differential between gas and fuel oil prices narrowed.

The EIA said that in the event of higher temperatures in July and August in regions that use large amounts of gas for power generation, the competition for gas supply between cooling and storage sources could lead to some increase in gas prices. However, the likelihood of any significant summer jump in gas prices now seems unlikely. Spot natural gas prices at key regional market points have come down dramatically since the spikes seen in December 2000 and January 2001. Even prices at the Southern California border have collapsed toward the national average after spending the November to May period elevated to well above other spot market prices.

After peaking in January, natural gas prices have fallen dramatically over the last six months to less than half of what they were at the beginning of the year. Although storage levels started out this year on the low side, recent mild spring weather throughout much of the gas consuming portions of the nation along with the lower market prices have led to a higher than anticipated underground storage build. In fact, storage injections hit record highs in April through June. For the third quarter, average wellhead prices are projected to decline, averaging $3.40/Mcf. EIA last month projected that average natural gas wellhead prices will decline this spring and summer, averaging $4.14/Mcf (see NGI, June 11). The average for all of 2001 is now projected to be about $4.50/Mcf. For 2002, EIA expects the storage and production situations to remain healthy and, thus, foresees a decline in the average annual wellhead price to about $3.50/Mcf.

Meanwhile, the EIA said that U.S. natural gas demand is projected to grow by 1.6% this year, compared with estimated 5% growth in 2000. Growth in 2002 is expected to rise by 4.4% as the economy picks up from its dip in 2001 to a growth rate of 2.5% and as a much improved supply situation keeps prices in check and prevents the kind of massive fuel switching seen in early 2001.

Increases in natural gas production, the mild summer weather thus far and the loss of some demand for gas in the industrial and utility sectors has resulted in the higher levels of storage injections seen in the early part of this summer. Based on EIA survey data and recent information from the American Gas Association on early-season storage additions, EIA estimates that, on an EIA survey basis, working gas in storage at the end of June was 1,940 Bcf.

Storage is currently in surplus to last year's level at this time and was even above the five-year average at the end of June. Together with mild weather, this has caused spot and near futures prices to fall to close to $3.00/Mcf from recent average monthly peaks of well over $5.00/Mcf. Continued high storage injections are expected for the remainder of the summer and gas storage levels at the beginning of the heating season on Nov. 1 are expected to be significantly higher -- perhaps by as much as 10% -- than they were at that time last year.

Domestic gas production is estimated to have risen by 2.4% in 2000 and it is forecast to continue to increase by 3.6% in 2001 and 2.9% in 2002. This is the result of production responses to the high rates of drilling experienced over the past year. According to Baker Hughes, the gas rig count continued to rise to new record highs during the month of June. Net imports of natural gas are projected to rise by about 6% in 2001 and by 10% in 2002.

The EIA said that this summer's overall cooling degree-days (CDD) are projected to be 4.2% above normal based on April through September temperatures and about the same percent above last summer's CDD total. Summer electricity demand is expected to be 1.9% higher than last summer based on economic factors.

Hydropower generation in the crucial Pacific Northwest is expected to be down by 16% from last summer, due mainly to lower water levels. In its June outlook, EIA was projecting that hydropower generation from the region would be down by 7.5% from last summer.

As for electric utility fuels, the EIA noted that last summer the surge in wellhead gas prices pushed delivered gas prices far above heavy fuel oil prices on a cost per Btu basis, giving oil the competitive edge. However, the recent reversal in natural gas prices, combined with the assumption of rising world oil prices, may now lead to a competitive advantage for gas during parts of this year and next. Because natural gas was often either expensive and/or unavailable as a fuel for electric generation for the first half of the year, demand pressure was put on coal. Stocks of coal at electric utilities had fallen dramatically from historical levels, leading to increases in coal prices after years of slow but steady decline. Thus, for 2001, the cost of coal to electric utilities is projected to gain. On an inflation-adjusted basis, however, coal prices should still show a modest decline this year.

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