Analysts Expect Return of Price Spikes During 1Q99
With storage levels already above 3 Tcf, few observers are
expecting the industry to have any trouble meeting gas demand early
this winter. But the first quarter of next year, could provide a
market test not seen in the past two winters, several analysts
warned last week. In its October Short-Term Energy Outlook, the
Energy Information Administration (EIA) seems to agree.
Raymond James & Associates Equity Research group told its
clients last week a return to normal temperatures this winter could
bring a greater gas market surprise than expected. Winter
consumption spikes over the past two winters have trended downward,
but that was because winter 1996/97 was nearly 5% warmer than
normal and last winter was nearly 9% warmer than normal, the firm
noted. Normal weather likely will bring a significant increase in
consumption, particularly during the first quarter of next year,
and with it a significant increase in gas prices this winter
compared to last.
"The bottom line is that the past two exceptionally warm winters
may have lured investors and gas consumers into a false sense of
security regarding the possibility of spot gas shortages this
winter," the investment group said. "A return to even normal winter
weather could lead to surprisingly large winter gas demand spikes.
As recently as three years ago, such a demand surge caused natural
gas prices to spike upward into the double digit range."
Raymond James & Associates' estimates show that a return to
normal weather this winter would lead to an 8% year-to-year
increase in gas consumption. "If our gas distribution system is not
prepared for this demand swing, look out for significantly high gas
prices at least for short periods this winter."
The EIA is predicting wellhead prices for the first quarter of
1999 to average 50 cents higher than the prices in the first
quarter of 1998, which were depressed because of the unusually warm
first quarter of this year. For the fourth quarter, however,
assuming normal weather, EIA expects prices to be almost 13% less
than prices for the same period last year because of the much
larger cushion of stored gas going into this winter and lighter gas
demand because of slower economic growth. "[W]e expect fourth
quarter 1998 heating demand to be slightly below the year-ago
level," EIA said in its October Short-Term Energy Outlook.
The American Gas Association's storage report last week showed
another strong week of injections, with 58 Bcf stored during the
week ending Oct. 16. Currently working gas levels are at 3,010 Bcf,
which is only 78 Bcf less than the highest level entering winter in
the past four years and there still are several weeks left in the
injection season. Such a high level of gas in storage, 227 Bcf more
than at the same time last year, should assist the industry in
meeting increased demand this winter. According to the EIA, the
industry will need that extra help.
"Next year, a much broader natural gas demand growth profile is
likely, particularly if a normal or colder-than-normal winter
occurs," EIA said. Base case demand is expected to be almost 9%
above year-ago levels in first quarter 1999. Gas demand is expected
to grow across all sectors in 1999 under the assumptions of normal
weather conditions and continued economic growth. Gas demand is
projected to rise by 3.8% in 1999." Average wellhead prices next
year are projected to increase by about 10%.
Wefa Inc.'s gas consulting division also came out with a report
last week cautioning clients about the likelihood the La Nina
weather pattern this winter will cause temperatures to vary
significantly from normal, particularly in the Midwest and
Northeast regions, and gas prices to spike. "Consequently, we
believe the Nymex strip prices for January through March are on the
low side," Wefa said, noting the most likely time to see colder
than normal weather this winter is between January and March. The
November-March strip was $2.39 on Friday and slipping.