EEA: 2002 Gas Prices Below $3 on a 'Consistent Basis'

Assuming that weather conditions stay consistent with the 1970-1999 average, and oil prices continue to moderate, Energy and Environmental Analysis Inc. (EEA) expects natural gas prices at the Henry Hub to average $3.28/MMBtu this month and $3.07/MMBtu for the remainder of the 2001 gas storage injection season. The research firm said it expects working gas in storage to reach 3.2 Tcf by the start of the winter heating season, higher than the 3.03 Tcf in 1999 and 2.66 Tcf in 2000.

In its Monthly Gas Update for July, EEA said it expects Henry Hub gas prices for the upcoming winter to average around $4.30/MMBtu. However, as domestic supply continues to strengthen in 2002, the company said it expects to see prices drop below the $3/MMBtu level on a "consistent basis."

Based on the company's July projection, which considers normal weather-driven demand and current storage levels, EEA said it expects storage injections to average about 12 Bcf/d for July through September, a sharp increase from the average of 8.3 Bcf/d injected into storage during the same three-month period last year. EEA also took into account the prolonged decline in industrial gas demand resulting from high energy prices and the economic slowdown.

"For example, production of ammonia has been hit hard by high gas prices that have made it uneconomical for producers to compete with the more attractively priced imports of the product," EEA said in its update. "This has translated into a decline of over 50% of gas demand that has been used historically--about 500 Bcf per year--to produce the commodity, with no signs of a significant recovery in the foreseeable future."

With the surge in domestic drilling starting to have an impact on the market, EEA said U.S. productive capacity will satisfy about 84% (55.3 Bcf/d) of total demand for the remainder of the injection season. Canadian imports and LNG shipments will continue to fill in the cracks, contributing 10.1 Bcf/d. EEA estimates that 2002 will bring the gas supply and demand model into better balance as domestic productive capacity continues to grow.

As for the nation's gas-fired power generation, EEA said its forecast remains mostly intact from its June outlook. With more than 60 GW of gas-fired generation expected to come online over the next 18 months, gas' share of total generation is expected to grow to 17% in 2002, EEA said. To supply this growth, gas demand for the power sector is estimated to climb to nearly 14 Bcf/d in 2002, assuming hydroelectric generation returns to 10-year average levels. However, if water levels remain low in the Pacific Northwest, gas demand to pick up the slack could increase by 0.7 Bcf/d.

Even with the recent push in building new gas-fired generation, it still looks as if California will have some trouble this summer and impact surrounding states. Just last week, for the first time in the state's history, Nevada was subjected to rolling blackouts for approximately an hour. Even though Nevada was experiencing near-record high temperatures and outages in a few state plants, EEA said California's power crisis also contributed. Since California's new FERC-imposed price limit is 10% higher than that imposed on the surrounding 10 states, power providers have become more inclined to sell to California, thus creating a problem for Nevada.

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