EEA: Gas Market Could Remain at Full Throttle Over Next Two Years
While congressmen and regulators are busy scheduling investigations into high gas prices, consultants at Energy and Environmental Analysis Inc. (EEA) reiterated in their most recent Monthly Gas Update that they have been expounding the view of prevailing gas market tightness since the late 1990s. "To put it bluntly, barring real warm winter weather or a deep recession, five dollar per MMBtu plus natural gas prices are here to stay for the next few years," EEA said.
EEA's price forecast is somewhat supported by the current projections of the federal government. The Energy Information Administration said in its most recent Short-Term Energy Outlook that it expects average natural gas wellhead prices to fall only slightly over the next two years, averaging $4.98 in 2003, $4.85 in 2004 and $4.70 in 2005.
Looking back on the market situation in late 2001 and 2002, EEA noted that the underlying supply/demand tightness was hidden by the warmer than normal winter in 2001-2002, the subsequent higher than normal season ending working gas levels in storage in April 2002 and the lower than average storage injection needs in 2002. The situation was made worse by the economic slowdown in 2002, which lowered gas demand and further kept gas prices in check.
However by the beginning of 2003, the weather had returned to normal and the economy was showing signs of recovery. In 2003, the economy bounced back, including a burst of 8.2% annualized growth in the third quarter. As the economy rebounded gas storage injections began to compete more with consumption, pushing prices back to $5/MMBtu. High oil prices also have limited fuel switching, and drilling increases have failed to provide much, if any, of an increase in productive capacity, EEA noted.
Nothing illustrates the market tightness better than a close look at the comparison between gas productive capacity in the Lower 48 states and actual production, according to EEA. A graph provided by EEA shows that gas production has been bumping up against productive capacity since about 1998 and has been steadily equal to productive capacity since winter 2000-2001.
"If anything, fundamentals [currently] point to a trend of even higher natural gas prices," EEA said. "Of course prices can and will swing up and down depending on the current sentiment of the financial markets. Natural gas demand will continue to increase with the growing economy. Increased electricity demand and new gas-based power plant capacity will increase gas consumption in the power generation sector. Any offsetting declines in industrial natural gas consumption are limited."
EEA noted that liquefied natural gas (LNG) imports were a blessing last year, nearly doubling to about 1.5 Bcf/d. Over the next two years, LNG imports will continue to increase but eventually will bump up against capacity. The Lake Charles LNG terminal expansion is expected to nearly double gas sendout but will not be completed until 2006.
"For the next few years, supply will struggle to keep up with demand pressures," EEA said. "This will keep U.S. natural gas prices at or greater than current levels." The only potential relief could come from new LNG import terminals, according to EEA, but they face a lengthy approval and construction process.
"With 'normal' weather we expect Henry Hub prices to average near $6/MMBtu for the remainder of this winter... We expect Henry Hub prices for the next [storage] injection season, April 2004-October 2004, to average approximately $5/MMBtu.
"Prices throughout 2004-2005 will remain high compared to historical levels," EEA predicts. "Increased natural gas productive capacity and increased LNG imports will not be high enough to bring gas prices below $4/MMBtu. We expect Henry Hub prices will average $5.30/MMBtu in 2004 and $6.10/MMBtu in 2005."
Even with working gas levels in storage higher than historical averages, EEA believes prices will remain strong because of the demand increases from the rebounding economy and gas-fired power generation and the limits on fuel switching due to high oil prices.