The Department of Energy’s Energy Information Administrationsaid on Friday it is expecting the highest average gas wellheadprices (nominal) in history this year and the highest prices inreal (inflation-adjusted) terms since 1985.

“We are projecting that natural gas [average wellhead] priceswill increase by 50% this summer (April-September) compared to lastsummer and by 60% this winter (October-March) compared to lastwinter. Naturally, higher end-use prices will result from higherprojected wellhead prices. The wellhead price for the year isprojected to average over $3/Mcf,” EIA said in its July Short-TermEnergy Outlook.

“Unless demonstrable improvements in North American gasproduction materialize soon, a break in gas wellhead prices fromthe current $4.00-$4.50/Mcf range may not develop until nextspring.”

Natural gas prices are expected to remain high on the strengthof increasing demand, primarily from the electric power generationsector, and its impact on already low gas storage levels. The EIAalso is looking for a return to normal weather this winter, whichwill mean sharply higher heating demand than what occurred lastwinter.

The injection rate for gas into storage continues to be “toosluggish to comfort the market for next winter’s heating season,”EIA said. It estimates underground working gas storage levels arecurrently about 18% below year-ago levels (22% according toAmerican Gas Association statistics). “Using a five-year (1995 to1999) average for working gas levels at the end of June, weestimate the current storage ‘deficit’ to be only about 140 Bcf,not really outside of the normal range. Still, with current andexpected demand growing strongly, even a small deficit relative tohistorical averages can have significant implications for marketprices.” Working gas in all Canadian storage facilities increasedto 45.2% of capacity as of June 23 compared with 56.8% full a yearago, EIA noted.

“At current injection rates, the availability of natural gas fornext winter has become chancy, as seen in the buoyancy and levelsof today’s prices,” the agency said. “Hot summer weather inportions of the country that consume large amounts of gas-generatedelectricity has also contributed to the low storage injection rate.Natural gas that would normally be injected into storage has, tosome extent, been used (indirectly through electric utilities) torun air conditioners.”

EIA expects increasing imports from Canada to make up some ofthe lost ground in the fall. “The ability of the domestic industryto push gas storage to comfortable levels by the beginning ofautumn remains in question at this time. However, we have revisedexpected gas net imports upward for late fall and into 2001 underthe assumption that the current price regime will generate greatersuccess by Canadian suppliers in filling new export capacity on theAlliance pipelines.”

The effects of increased drilling for gas in the U.S. probablywon’t appear in the form of increased production until after thenext heating season, EIA said.

Meanwhile, the strong economy and boom in gas-fired powergeneration is expected to continue increasing gas demand.Electricity demand so far this year has risen by about 4% comparedto 1999 levels, EIA said, noting there also has been a fear factorassociated with potential reliability problems in the West andNortheast.

Natural gas for power generation is projected to yield itsapparent average price advantage over residual fuel oil by thefourth quarter of this year. Stocks of high-sulfur distillate fueloil (heating oil) particularly in the Northeast are currently atextremely low levels. There is a “potential for a repeat of lastwinter’s home heating oil price shock,” EIA said. “A rapid stockbuild, which is likely once the driving season ends, and higherlevels of imports of distillate fuel would make the high pricescenario less probable. A mild winter in the Northeast would alsoease the pressure.” Fuel oil is also projected to be the cheaper ofthe two fuels for most of the year 2001, according to EIA.

The forecast for overall gas demand in 2000 and 2001 has beenrevised upward from the levels EIA previously forecasted in June.”This is primarily due to an upward revision in projected rates ofgrowth in commercial and industrial activity in the United States.We now expect about 5% growth in U.S. GDP in 2000 compared to about4% in our previous projections. This shift yields a 4.3% annualgrowth rate in 2000 for gas demand compared to 3.4% projected lastmonth.”

Is OPEC to Blame for Natural Gas Price Spikes?

Despite strong demand and soaring crude prices, EIA places mostof the blame for the current high gas price situation on tightsupply. “Although rising crude oil prices have encouraged naturalgas prices to advance, the primary cause of these elevated gasprices has been the delicate supply situation,” EIA said.

However, in a new report released last week, ICF Consulting saidit’s not so sure about that. “Extreme weather, storage levels,short-term deliverability, and crude oil prices also havecontributed significantly, but high oil prices are the big driver,”said ICF Vice President Robert E. Baron.

“Today’s conventional wisdom holds that crude oil prices nolonger have significant influence on natural gas prices. But, this’de-coupling’ appears to have been reversed, at least for the timebeing,” said Michael L. Godec, managing director of ICF’s oil andgas practice. “Oil and gas prices de-couple when excess gas supplyexists and oil prices are low. In such instances, the gas market isdriven by gas-on-gas competition, and gas prices at the burnertipfall below parity with petroleum prices. But today, the situationis the opposite; oil prices are high and gas supplies are tight. Asa result, oil and gas prices at the burnertip are near parity andhave again become coupled.”

Using proprietary gas resource and market assessment models, ICFsimulated the market over the past two years and evaluated thefactors that could affect prices. The findings are part of thecompany’s North American Gas Market Outlook 2000, an annual reviewof supply and demand and the other events driving the gas market.

“There’s more oil-fired generation capacity out there than mostpeople give the market credit for,” said Godec. “We also haven’thad oil prices this high in a long time. The de-coupling of oil andgas prices occurred because oil prices were maintaining such lowlevels.

“There’s also the concern that we have not seen the increase indeliverability that would be commensurate with higher prices, andthere’s a psychological factor associated with [this].Deliverability is down. I still don’t think we’ve worked ourselvescompletely out of the impact of the low-price world that we livedin a year to a year-and-a-half ago,” he said, echoing EIA’sremarks. “We’re only beginning to see the increase indeliverability that is resulting from the increase in drilling. Ifwe wait another six months I think we’ll see a pick up indeliverability as new production comes on line as people go out anddrill more risky but more productive prospects. Our analysisindicates that the supply is there at certain prices. Beginning inthe fall and certainly by next spring I think we’ll start seeing aturnaround. By next spring, I think will stabilize and prices willbe back down in the $2.50-$3 range.”

For more information on the ICF Outlook contact Godec at703-934-3869 or mgodec@icfconsulting.com . The ICF Outlook isdelivered as a 2 hour presentation at the client’s office. Copiesof the presentation itself are left with the client for futurereference. The charge for the service is US$7,500 plus other directcharges (travel, photocopying, telephone, etc.).

Rocco Canonica

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