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EIA: Gas Vulnerable to Winter Price Shocks

EIA: Gas Vulnerable to Winter Price Shocks

Due to low inventory levels, natural gas and heating oil will be the most vulnerable of all home heating fuels to potential price shocks this winter if the weather should turn colder than normal, according to the Energy Information Administration's (EIA) latest Short-Term Energy Outlook.

Natural gas wellhead and spot prices for this winter are likely to be nearly double those of a year ago, leading to an almost 30% hike in delivered gas costs for residential and commercial customers; up to an 80% increase for electric utilities and as much as 66% upswing for industrial users, the Department of Energy (DOE) agency said. The agency noted, however, that in real, adjusted-for-inflation terms, natural gas prices are lower than they were in the early 1980s, before deregulation.

Assuming a normal (cold) winter, the EIA projects the average winter wellhead price will be $4.48/Mcf, and that spot prices (which have been hovering around $5/Mcf) will maintain much of their strength. As a result, prices paid by residential consumers in the Midwest this winter will rise on average by nearly 30% to $8.58/Mcf compared to an average of $6.61/Mcf last winter, making this the largest percentage increase of all heating fuels used by the residential sector. Expenditures by Midwest households for natural gas this winter will increase even more sharply --- 44% --- to $780 from $540 last winter, said the agency report, which also includes its "Winter Fuels Outlook: 2000-2001."

However, given that natural gas and heating oil are starting out the winter season with inventories at sub-par levels, the EIA said it sees an "enhanced risk of significant upward price shocks" in the event heating degree-days are 10% colder than normal this winter. Under such a scenario, natural gas prices could spike 10.5% above their predicted base levels for residential customers, while distillate fuel oil prices could jump an additional 30%, it noted.

For 2000, wellhead prices are expected to average $3.40/Mcf, which in nominal terms would make it the highest annual wellhead price on record, the DOE agency said. In real inflation-adjusted terms, it represents the highest annual average wellhead price since 1985.

The EIA anticipates the high wellhead prices will moderate slightly in 2001 to $4.39/Mcf during the first quarter and $3.59/Mcf in the second period.

A number of factors are converging to cause the higher prices this winter heating season (October to March): a downswing in gas production in past years, high demand under normal weather assumptions, below-normal gas storage levels, high crude oil prices, and tight alternative fuel (oil) markets, the EIA reported. Concerns are particularly acute about storage levels, which it says was about 8% below the five-year average of about 3 Tcf at the start of winter.

As a result of these market influences, "retail energy fuel costs --- already quite high by recent historical standards --- will remain high amid tight supply conditions, posing increased risks of short-term price spikes similar to those of the previous winter. In contrast to the 1999-2000 winter season, natural gas households are likely to see the largest year-over-year percentage increases in fuel bills of any heating fuel," the EIA said in its Fuels Outlook.

Demand this winter is projected to average 71.2 Bcf/d, up 4.1 Bcf/d (6.1%) over last year; residential and commercial customers are expected to absorb half of that if the winter weather is normal. Because production will only contribute 51.8 Bcf/d to meet the overall consumption level, storage is expected to play a pivotal role this winter --- especially in East Coast markets, the EIA said. Working gas storage at the start of the heating season (Oct. 1) was estimated at 2.53 Tcf, or about 227 Bcf below the five-year average, it noted.

The shortfall between demand and production this winter will be made up from storage withdrawals, about 9.2 Bcf/d, and imports of 10.23 Bcf/d, the EIA said.

"At current injection rates, it is becoming increasingly uncertain whether or not ready supplies of gas will be available during the heating season in sufficient quantities to avoid sharp upward price pressure if winter weather turns out to be very cold," according to the EIA outlook.

Moreover, the agency said it wasn't counting on the new Alliance Pipeline from Canada to be of much help in easing the U.S. supply crunch this winter. "Assuming that it will take several months before Alliance reaches its full capacity of 1.3 Bcf/d, that pipeline may not fully contribute to advancing new gas supplies until the heating season is nearly over. Even if Alliance is near capacity at mid-winter, it is likely that a substantial portion of the volumes contracted for delivery on the system will have been de-contracted from other systems, particularly TransCanada Pipeline System. Thus, it is an important question as to just how significant Alliance will be with respect to net new supply from Canada."

Overall, natural gas demand is expected to average about 5.74 Tcf for the fourth quarter, and rise to 7.22 Tcf in the first quarter of 2001, according to the EIA. It estimates that gas will finish out 2000 with a demand rate of about 22.2 Tcf, up 4% from 21.36 Tcf a year ago.

Susan Parker

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