Despite the recent run-up in natural gas prices, the U.S. Energy Department believes a shift to the downside is likely because of excess storage, more than adequate production capacity and only a moderate increase in demand. The downturn will come “once the summer season starts and the weakness of (storage) injection-related wellhead demand becomes more apparent,” according to the Short-Term Energy Outlook issued last week.

The agency’s forecast goes against those of investment analysts who have been raising forecasted prices in recent weeks (see Daily GPI, April 8 ). Based on the recent resurgence in the U.S. economy and the technical rally sparked by a surge in oil prices, Salomon Smith Barney (SSB) analyst Robert Morris has revised the company’s natural gas price forecast upwards for 2002 and 2003. Earlier last week, Raymond James analyst Wayne Andrews cited stronger supply-driven fundamentals as reason for a more bullish near-term gas outlook, which should support higher natural gas prices during the second and third quarters.

DOE predicts the price downturn despite the fact that it sees production capacity decreasing this year by 4.7% compared to 2001, at the same time demand increases by 2.1%. A mitigating factor is that natural gas storage levels are expected to end the heating season at 1,569 Bcf, more than double last year’s level.

DOE’s Energy Information Administration (EIA), which compiles the report, estimated the average March spot price at the Henry Hub was $3.03, or about 70 cents/MMBtu above the February price. The March price last year was above $5. The agency blamed four major uncertainties for recent high prices: (1) questions about the strength of the expected domestic recovery; (2) the potential for disruption of the world oil market; (3) some added gas load from new power generation capacity coming on line; (4) a slowdown in drilling since July 2001.

Some of those uncertainties are being resolved, however. Despite the fall-off in drilling, EIA believes there is a “significant excess” of natural gas production capacity, and there will be only moderate demand growth. Add that to the excess gas in storage and prices will drop towards $2.50/MMBtu as the summer season kicks in. The agency believes the drilling decline has about hit its low point and drilling will again increase.

EIA’s forecast for electric power shows demand is expected to be level with last summer’s demand “due to both weather and economic factors. Cooling degree-days are assumed to be normal, 1.9% below last summer’s level. Also, although the economy is assumed to grow through the summer months, it is expected to improve slowly.” Demand is expected to pick up by 2003 which should see about a 3.2% increase.

The recovery of hydropower generation is expected to make a big difference. Last year hydropower was at lows not seen since 1966. But total hydro generation is expected to be up by 22% this year “if normal precipitation materializes in the Pacific Northwest. Total oil-fired generation is projected to be down considerably, by 38%, from last year in both the utility and non-utility sectors due to higher relative prices, while total gas-fired generation is projected to increase by 1.8% due mostly to increases in demand by the non-utility sector.”

The Short-Term Outlook also sees the scare over the possible loss of significant nuclear power generation this summer as dissipating. DOE notes that it appears the investigation of a number of plants by the Nuclear Regulatory Commission is not turning up problems similar to those experienced by FirstEnergy’s Davis-Besse plant in Ohio. Corrosion discovered there in February had caused significant damage to the reactor head, which will sideline the plant for an extended period. “The temporary loss of this capacity is offset by increases in capacity at several reactors due to NRC-approved upgrades ranging from 2% to 20% and totaling several hundred megawatts in each year of the projection” (see related story this issue).

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