EIA: Supply Fears Prop Up Spot, Futures Prices

Due to warm winter weather in certain regions last month, increased fuel switching and industrial slowdowns, the country consumed 140 Bcf less natural gas than was anticipated in January, which led to much lower spot gas prices towards the end of the month, according to the Energy Information Administration's (EIA) Short-term Energy Outlook for February.

While this is good news for consumers and the energy market in general, it doesn't erase all of the "uneasiness about the supply situation," or cancel out the fact that spot prices continue to be "quite high by historical standards," said the EIA, the statistical arm of the Department of Energy (DOE), last week.

Although spot prices slumped below $6/Mcf by the end of January, they averaged a record $8.98/Mcf for the entire month, the agency said. It projected prices will average about $6.14/Mcf for the entire winter (October-through-March period), which is more than two and half times that of last winter. The EIA sees prices falling during the spring and summer by about $4/Mcf from the winter peak, assuming normal weather and low storage levels persist. Still, it doesn't expect them to dip much below the $4 mark throughout 2001.

Working gas storage at the end of January was 38% full, or 1,241 Bcf. "Although this points to an improvement for end-January stocks over previous expectations, with almost two months of winter still to go, continuing fears about the domestic supply situation are helping to maintain relatively high spot and futures prices," the EIA reported. "Still, given recent spot price movements, a drop of about $3 per Mcf is possible in February, compared to the January average [of] $8.98."

Overall gas demand last month was up about 5%-6% over last year, but this was nearly half of the growth that was witnessed during November and December (13%), according to the EIA. Assuming normal weather, it projects demand will grow by 2.3% in the year ahead and by 4.1 % during 2002. This compares to a demand growth of 4.3% for last year.

To meet the anticipated growth in consumption, the EIA sees gas production significantly increasing by 5.4% during 2001 and by 2.5% in 2002, compared to a 1.1% growth level last year. It further predicts that gas imports - mostly from Canada - will rise about 16% this year and by another 4% in 2002. It cited a new report by Canada's National Energy Board that predicts gas deliverability from western Canada will rise by 1.1 Bcf/d by 2002 due to the ongoing drilling boom. Western Canada provides about 15% of the gas consumed in the United States.

In California, the agency doesn't foresee an immediate end to the power and gas supply crunch. "The situation in California is characterized by low gas storage, gas pipeline bottlenecks, high demand and low hydro and nuclear electric power availability. These supply problems are following on last summer's supply problems with no obvious end visible over the next two years."

Susan Parker

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