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EIA: Supply Concerns Persist, Demand Strong

EIA: Supply Concerns Persist, Demand Strong

The Energy Information Administration warned last week in its Short Term Energy Outlook that recent natural gas market activity "reveals the backdrop of potential supply shortfalls," particularly in light of increasing demand from the power sector and the winter heating season approaching.

The agency noted the recent resurgence in spot and futures prices "illustrates continued volatility amidst uncertainty regarding North American supply adequacy, demand potential and even potential hurricane damage." Sharply higher gas drilling activity should improve supply, "but apparent performance so far in 2000 curtails optimism about significant improvements before the onset of the heating season."

EIA said the storage injection rate continues to be "too gradual to calm the market for next winter's heating season." Storage levels are currently about 18% below year-ago levels, according to EIA. Hot weather, particularly in Texas and California, has contributed to the low storage injection rate, the agency noted. "Natural gas that would normally be added to storage has, to some extent, been used (indirectly through electric utilities) to run air conditioners. Furthermore, demand for natural gas has been growing due to the expanding economy over the last 7-8 years and the widening role of gas generation at power facilities."

EIA expects gas storage levels to end the injection season 7% below last year's level. "It should be noted," EIA said, "that it is not so much the absolute level of inventories that are of concern (we expect gas storage to be within a few percentage points of the 1995-1999 average at the beginning of the upcoming heating season). Given the strong propensity for incremental power demand to be met by gas-fired units (particularly if hydroelectric power continues to decline and nuclear power output does not grow significantly), and given a strong likelihood that heating demand will be up sharply this winter, expected demand relative to anticipated storage levels may be the highest it has been in many years. The impact of this situation on prices is, we think, strengthened by the lack of significant domestic production increases yet this year."

EIA expects gas demand to grow 4.3% in 2000 and 3.2% in 2001. The industrial sector is leading the charge with an expected gain of 9.9% this year, while electric utility demand is expected to decline by 5.2%. "This dichotomy is due in part to sales of electric generating plants by electric utilities to unregulated generating companies, fuel consumption by which is recorded by EIA in the industrial sector." For the power generation sector as a whole, gas demand is expected to post 4.6% growth in 2000.

Noting recent increases in drilling and E&P spending, EIA said it is maintaining a "conservative view of possible increases in domestic gas production for 2000 and 2001, with assumed increases of 0.5% and 1.0%, respectively, for this year and next." The U.S. gas rig count on Aug. 4 was at a recent high of 772 rigs. "Still, given that gas-directed drilling in the United States has exceeded 600 rigs since late last October (compared to the low point of 362 reached in late April 1999) and has exhibited 20% to 70% year-over-year increases since that time with little evidence of rapidly improving production performance through the first half of 2000, expectations of strong increases in U.S. production before the end of this year are probably optimistic if not entirely unwarranted."

Net imports, however, are projected to rise by 12% in 2001, EIA noted. Alliance pipeline will add 1.35 Bcf/d of new import capacity, which is expected to be expanded to 1.83 Bcf/d.

EIA is projecting that gas prices at the wellhead will increase by about 55% this winter compared to last winter, and it forecasts wellhead prices will average $3.09/Mcf this year, which would be the highest annual wellhead price (nominal) since 1985.

Total annual electricity demand for 2000 and 2001 has been revised somewhat compared with EIA's July Outlook. Total electricity demand in 1999 has been revised upward slightly, while 2000 demand expectations have been revised downward slightly due to the generally cooler than normal summer temperatures overall, despite periods of high temperatures in the south and west. Annual electricity demand growth is now projected to be 2.1% in 2000 and 2.45% in 2001.

This summer's cooling degree-days are expected to be 4.6% below last summer's. In July, overall CDD were 10% below normal and 22% below July 1999. "Still, underlying demand remains strong and shortages cannot be ruled out in some areas, particularly if August turns out to be a hot month. Major concerns for utilities are the possibility of severely spiking power prices and transmission equipment failure during hot spells."

Rocco Canonica

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