EIA Raises Price Forecasts, Confirms Dire Storage Situation

The Energy Information Administration (EIA) again raised its wholesale and retail gas price projections for the winter and confirmed that gas storage levels at the end of December were lower by 10% than the previous record low set in 1976.

Strong demand during November and December, which the National Weather Service has said were the coldest on record, reduced gas stocks to record lows for the period, and continued cold should keep storage low and prices very high for the remainder of the heating season, EIA said in its January Short Term Energy Outlook.

For the fourth quarter of 2000, gas-weighted heating degree-days were estimated to have been up by 28% over 1999's relatively mild fourth quarter. Gas demand increased 10% over the year prior. Over the entire six months of winter (Oct. 1, 2000 to March 31, 2001), EIA projects demand will rise by 7% compared to the prior winter, with residential and commercial sector demand up by 17%.

EIA now expects wellhead prices to average $5.20/Mcf in 2001 compared to an estimated $3.70 in 2000 (72% higher than in 1999) and about $4.50 projected for 2002. It also raised its projections on retail prices to 70% above winter 1999-2000 levels.

The expected 45% increase in the nominal average residential price would be the highest season-to-season growth rate since at least 1975."

Wellhead prices from September through November were more than double the price of a year earlier. For the month of December, spot wellhead prices averaged "an unheard of $8.36/Mcf. Never have spot gas prices at the wellhead been this high for such a sustained period of time," EIA said. "Although high oil prices have encouraged the current strength in gas prices, the predominant reason for these sustained high gas prices was, and still is, uneasiness about the winter supply situation."

The American Gas Association (AGA) reported last week that working gas levels in storage had fallen 209 Bcf during the week ending Dec. 29 to 1,729 Bcf. "Translating the AGA data into EIA end-month statistics, we estimate that gas stocks were about 780 Bcf below year-ago levels and about 520 Bcf below the previous 5-year average," EIA said. "With almost three months of winter still to go, falling stocks have raised fears about the domestic supply situation, helping to elevate spot and futures prices."

The AGA made its own announcement last week, assuring the public that gas supply would be "adequate to meet customers' needs for the remainder of the winter heating season.

"Today, there is more natural gas held in underground storage --- 1.73 Tcf --- than has ever been removed from storage during the remainder of any of the last five winter heating seasons," said AGA President David Parker. Natural gas storage accounts for about 20% of the natural gas consumed during the winter heating season, which traditionally runs Nov. 1 - March 31.

"Rig counts are at record levels and new production will be forthcoming," he noted. "But it takes time for new exploration to produce adequate volumes of gas to meet increased demand."

In the meantime, Parker noted, utilities are promoting energy-efficiency tips, reminding customers of flexible bill-payment programs and working to help low-income individuals.

EIA expects wellhead prices to remain above $6 for the remainder of the heating season, with prices averaging $6.23/Mcf this winter, "more than two and one half times the price of last winter." EIA predicts wellhead prices during the spring and summer will drop by about $2/Mcf as weather-related demand recedes. However, storage injection demand should keep wellhead prices above $4 this year.

Assuming normal weather, EIA expects gas demand to grow by 2.9% in 2001 and by 2.7% in 2002, compared with estimated demand growth of 4.5% in 2000. The forecast for overall demand growth in 2001 is down considerably from EIA's projections last month because higher gas prices have reduced expected industrial gas use (up 4% from 2000) more than previously estimated. In 2002, the forecast is for even slower growth. However, gas demand from non-utility electricity generation in 2001 is now expected to be up by a solid 9%. Electric utility gas demand is expected to remain level with consumption rates in 2000.

EIA increased its projections on gas production growth in North America to 5.4% for this year and 2.5% in 2002. It projects a massive 16% increase in gas imports this year and another 4% hike in 2002. "While Canadian export capacity may not be fully utilized this winter, we expect net imports to be 7.8% higher than last winter's imports," EIA said, noting that the 1.325 Bcf/d Alliance Pipeline began service Dec. 1. EIA also referred to a recent report by Canada's National Energy Board that predicts gas deliverability from Western Canada will rise by 1.1 Bcf/d by 2002 because of the ongoing drilling boom.

Rocco Canonica

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