EIA Doesn't Foresee Below-$3 Gas This Year

Given the higher production levels and moderate summer temperatures (at least until last week), spot natural gas prices are likely to hover around $3/Mcf for the rest of the third quarter and rise later in the year, said the Energy Information Administration (EIA) last week in its Short-Term Energy Outlook for August.

"We don't think it's likely that gas prices will drop a lot further than that," said David Costello, an EIA economist and editor of the monthly report. There "certainly has been a lot of gas" chasing too little demand for much of the spring and summer, he noted, but "we're starting to see greater demand now" from Texas, the Northeast and elsewhere in the nation due to the 90-degree-plus temperatures.

"Temperate weather through the end of the year combined with economic stagnation, along with gains in gas production, could result in a collapse in prices" in the months ahead, the EIA acknowledged, but added that it didn't believe this scenario was likely. "...[R]elatively stable oil prices, increased gas use at electric utilities and the assumption of normal weather are likely to keep wellhead price levels above $3 on an annual basis for the near term," with the average spot price for all of 2001 projected at about $4.40/Mcf.

Costello said the EIA anticipates spot gas prices in the fourth quarter to be in the high $3/Mcf range (about $3.60) as the market enters the winter heating season. This would put prices next winter at about 40% below those of last winter, when they were above $6/Mcf.

The EIA's winter price projection is closely tied to production. "If gains in production capability prove to be sluggish, then the promise of significant gains in demand next winter...may contribute to price support at or above current levels. However, if production capability is growing sharply now, far more than a seasonal recovery in demand may be needed to preserve gas prices above $3 per/Mcf."

The EIA forecasts that domestic gas production will rise by 3.2% this year (on top of a 2.4% hike in 2000), while U.S. gas demand is projected to be flat due to a sharply lower economic growth rate, lower weather-induced consumption and fuel switching (by industrials) brought on by the higher prices earlier this year. This fall-off in industrial demand began to reverse itself in June in response to lower gas prices and new gas-fired generation load, it noted. Gas imports (mostly from Canada) are expected to be up a strong 4.9% this year, but they will be partially offset by increased exports to Mexico.

The EIA anticipates, however, that domestic gas demand will reverse itself in 2002, growing by 4.3% as the economy picks up and the improved supply situation keeps prices in check and prevents the kind of fuel-switching that was seen in early 2001.

The surplus gas in storage has been a major drag on spot prices, and will continue to be for the rest of the year, the DOE agency said. "Continued above-normal injections of gas into storage...are likely to keep pressure on near-term prices and lessen the likelihood of significant increases in prices in the 2001-2002 heating season."

The EIA believes that storage injections will be up for the remainder of the summer, with storage levels at the beginning of the heating season "significantly higher" (perhaps by as much as 15%) than they were last year. If the current hot temperatures persist, "we could see heightened competition for gas between cooling and storage demand sources and new increases in gas prices," the agency conceded, but it doesn't believe "significant" price spurts before winter are very likely.

©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.