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EIA: Gas Prices Will Remain Lofty for Entire Year

EIA: Gas Prices Will Remain Lofty for Entire Year

Expected rises in gas demand, a relatively slow storage buildup, strong crude oil prices and fears of a repeat of last summer's heat wave in key gas-consuming areas will pave the way for unprecedented natural gas prices for the rest of the year, the Energy Information Administration (EIA) said in its short-term energy outlook for June.

Spot wellhead prices have been averaging more than $4 per Mcf since late May, nearly doubling since the beginning of the year, the agency said. At the same time, futures gas prices for the next 12 months are expected to be extremely lofty, averaging $4.20 per MMBtu amid market concerns that deliverability will be insufficient to meet gas demand, the EIA outlook noted.

It expects the price trend to continue throughout 2000. "We are projecting that natural gas prices will increase by 50% this summer (April-September) compared to last summer, and by 60% this winter (October-March) compared to last winter." The EIA said wellhead prices for the year will average more than $3 per Mcf, and will be followed by a "slight easing" in 2001.

"Although rising crude oil prices have encouraged gas prices to climb, by far the major determinant for these robust gas prices has been the fragile supply situation. Simply put, the injection rate for gas into storage has been too slow to comfort the market for next winter's heating season," it said.

The EIA has estimated underground working storage levels are currently about 20% below year-ago levels. "At present rates of injection the availability of gas for next winter has become uncertain, as reflected in the volatility and levels of current prices." A major cause for the depleted storage levels and the rapid price runup has been the recent hot weather in regions that consume large amounts of gas-generated electricity. "Gas that would otherwise be injected into storage is now being used (indirectly through electric utilities) to run air conditioners."

The EIA predicts the United States may face a short-term supply constraint. "Several years of relatively low prices have slowed down exploration and drilling for new sources of supply. Recent higher prices have caused drilling to rebound, but new supplies may not begin to yield significant improvements in actual production until after this summer."

On the plus side for gas supply, it noted the U.S. rig count hit 662 for the week ending May 26, its highest level since the count began in March 1987. Still, the American Gas Association said the U.S. working gas during the week ending May 19 was only 37% full, or 1,218 Bcf, which was 414 Bcf lower than a year ago. "Storage holders have been unable or unwilling under the current pricing conditions to make any significant additions to storage," the EIA said. Canadian storage facilities aren't faring much better, reporting that they were at 34% of capacity as of May 19, compared to 44.9% a year ago.

Susan Parker

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