With storage levels already above 3 Tcf, few observers areexpecting the industry to have any trouble meeting gas demand earlythis winter. But the first quarter of next year, could provide amarket test not seen in the past two winters, several analystswarned last week. In its October Short-Term Energy Outlook, theEnergy Information Administration (EIA) seems to agree.

Raymond James &amp Associates Equity Research group told itsclients last week a return to normal temperatures this winter couldbring a greater gas market surprise than expected. Winterconsumption spikes over the past two winters have trended downward,but that was because winter 1996/97 was nearly 5% warmer thannormal and last winter was nearly 9% warmer than normal, the firmnoted. Normal weather likely will bring a significant increase inconsumption, particularly during the first quarter of next year,and with it a significant increase in gas prices this wintercompared to last.

“The bottom line is that the past two exceptionally warm wintersmay have lured investors and gas consumers into a false sense ofsecurity regarding the possibility of spot gas shortages thiswinter,” the investment group said. “A return to even normal winterweather could lead to surprisingly large winter gas demand spikes.As recently as three years ago, such a demand surge caused naturalgas prices to spike upward into the double digit range.”

Raymond James &amp Associates’ estimates show that a return tonormal weather this winter would lead to an 8% year-to-yearincrease in gas consumption. “If our gas distribution system is notprepared for this demand swing, look out for significantly high gasprices at least for short periods this winter.”

The EIA is predicting wellhead prices for the first quarter of1999 to average 50 cents higher than the prices in the firstquarter of 1998, which were depressed because of the unusually warmfirst quarter of this year. For the fourth quarter, however,assuming normal weather, EIA expects prices to be almost 13% lessthan prices for the same period last year because of the muchlarger cushion of stored gas going into this winter and lighter gasdemand because of slower economic growth. “[W]e expect fourthquarter 1998 heating demand to be slightly below the year-agolevel,” EIA said in its October Short-Term Energy Outlook.

The American Gas Association’s storage report last week showedanother strong week of injections, with 58 Bcf stored during theweek ending Oct. 16. Currently working gas levels are at 3,010 Bcf,which is only 78 Bcf less than the highest level entering winter inthe past four years and there still are several weeks left in theinjection season. Such a high level of gas in storage, 227 Bcf morethan at the same time last year, should assist the industry inmeeting increased demand this winter. According to the EIA, theindustry will need that extra help.

“Next year, a much broader natural gas demand growth profile islikely, particularly if a normal or colder-than-normal winteroccurs,” EIA said. Base case demand is expected to be almost 9%above year-ago levels in first quarter 1999. Gas demand is expectedto grow across all sectors in 1999 under the assumptions of normalweather conditions and continued economic growth. Gas demand isprojected to rise by 3.8% in 1999.” Average wellhead prices nextyear are projected to increase by about 10%.

Wefa Inc.’s gas consulting division also came out with a reportlast week cautioning clients about the likelihood the La Ninaweather pattern this winter will cause temperatures to varysignificantly from normal, particularly in the Midwest andNortheast regions, and gas prices to spike. “Consequently, webelieve the Nymex strip prices for January through March are on thelow side,” Wefa said, noting the most likely time to see colderthan normal weather this winter is between January and March. TheNovember-March strip was $2.39 on Friday and slipping.

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.