Natural gas production is on the upswing, according to EnergyInformation Administration’s November Short Term Energy Outlook.The agency said the “torrid pace” of gas drilling activity in NorthAmerica is starting to pay off. As a result, wellhead gas pricesshould ease further away from the $5/Mcf level through 2001 thanpreviously projected. Prices this winter, however, should stayabove $4.

With the U.S. natural gas rig count at a high of 845 as of Nov.3, EIA has increased its estimate for production growth in 2001 toabout 350 Bcf (1.9%) from its earlier forecast of 240 Bcf (1.3%).The agency continues to predict gas production will grow by 0.7%for 2000.

Net imports of gas are expected to rise by 12% in 2001,coinciding with the installation of the new 1.325 Bcf/d Alliancepipeline. The pipeline which travels from western Canada to theU.S. Midwest has experienced numerous start-up delays, mostrecently being pushed back to late November (see related story thisissue). EIA is unsure of what Alliance’s impact on supply will be,mainly because much of the contracted volumes are likely to comeoff of other Canadian lines particularly the TransCanada system.

“Although high oil prices have contributed to the currentstrength in gas prices, the predominant reason for these sustainedhigh gas prices was, and still is to some extent, perceptions aboutthe supply situation going into the winter,” the agency said.

The agency expects November will be the true measuring stick forgas supplies and prices over the rest of the winter heating season.Underground working gas storage levels are currently about 8-9%below year-ago levels, according to EIA. Historically the lastmonth in which gas is put into the ground, a cold November coulddecrease injections and send spot prices over the $5.00 mark again.However, if the weather turns unseasonably warm, “spot gas priceswould be expected to fall sharply.” As always, the weather will bethe key factor determining the direction of the gas market thiswinter, EIA noted.

“We are projecting that natural gas prices at the wellhead willincrease by about 90% this winter (October-March) compared to lastwinter. Of course, higher end-use prices will result from higherprojected wellhead prices. If our base case projections hold,residential prices for natural gas would be about 29% higher thanlast year during that period. For the entire year 2000, the averagewellhead price for natural gas is projected to average $3.37/Mcf.”

On the natural gas supply and demand front, EIA forecasts theoverall gas demand growth for 2000 will be 3.3%, down a little fromthe agency’s October prediction based on recent monthly data.Likewise, natural gas demand growth is expected to slump in 2001 to2.1% primarily reflecting higher gas prices relative to fuel oilprices, EIA predicted.

For this winter, the study shows gas demand will be up 5.1% overlast year’s winter demand levels, assuming normal weather whichimplies an 11% rise in gas-weighted heating degree days over lastwinter. For the residential and commercial sectors in the fourthquarter, demand for natural gas is expected to rise between 10 and11% over last year’s numbers for the same time period due largelyto the forecast for a normal winter. In the Industrial sector,demand is expected to increase by 6.4% in 2000. On the other hand,EIA predicts electric utility gas demand will decline by 2.7% dueto the trend of utilities selling their plants to unregulatedgenerating companies which are classified as part of the industrialsector. The agency expects gas demand among the industrial andutility sectors to record flat or slightly declined growth for 2001because it expects fuel oil will gain the price advantage overnatural gas.

“In the fourth quarter of 2000, previously falling demand foroil-fired generation is expected to turn around relative togas-fired generation, as the price differential between fuels inthe electricity generating sector shift to favor oil, causing thoseplants which can switch to oil to do so,” stated EIA. “Thefavorable price differential for oil relative to gas is expected tocontinue through 2001.”

Electricity demand growth is forecasted to be somewhat lowerthan the October Outlook at 2.2% in 2000 and 0.9% in 2001. Based ona normal winter, electricity sales by electric utilities areexpected to be up by 2.9% over last winter. Alex Steis

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