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

Natural gas wellhead and spot prices for this winter are likelyto be nearly double those of a year ago, leading to an almost 30%hike in delivered gas costs for residential and commercialcustomers; up to an 80% increase for electric utilities and as muchas 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 thanthey were in the early 1980s, before deregulation.

Assuming a normal (cold) winter, the EIA projects the averagewinter wellhead price will be $4.48/Mcf, and that spot prices(which have been hovering around $5/Mcf) will maintain much oftheir strength. As a result, prices paid by residential consumersin 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, makingthis the largest percentage increase of all heating fuels used bythe residential sector. Expenditures by Midwest households fornatural gas this winter will increase even more sharply — 44% —to $780 from $540 last winter, said the agency report, which alsoincludes its “Winter Fuels Outlook: 2000-2001.”

However, given that natural gas and heating oil are starting outthe winter season with inventories at sub-par levels, the EIA saidit sees an “enhanced risk of significant upward price shocks” inthe event heating degree-days are 10% colder than normal thiswinter. Under such a scenario, natural gas prices could spike 10.5%above their predicted base levels for residential customers, whiledistillate 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 wellheadprice on record, the DOE agency said. In real inflation-adjustedterms, it represents the highest annual average wellhead pricesince 1985.

The EIA anticipates the high wellhead prices will moderateslightly 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 pricesthis winter heating season (October to March): a downswing in gasproduction in past years, high demand under normal weatherassumptions, below-normal gas storage levels, high crude oilprices, and tight alternative fuel (oil) markets, the EIA reported.Concerns are particularly acute about storage levels, which it sayswas about 8% below the five-year average of about 3 Tcf at thestart of winter.

As a result of these market influences, “retail energy fuelcosts — already quite high by recent historical standards —will remain high amid tight supply conditions, posing increasedrisks of short-term price spikes similar to those of the previouswinter. In contrast to the 1999-2000 winter season, natural gashouseholds are likely to see the largest year-over-year percentageincreases in fuel bills of any heating fuel,” the EIA said in itsFuels Outlook.

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

The shortfall between demand and production this winter will bemade up from storage withdrawals, about 9.2 Bcf/d, and imports of10.23 Bcf/d, the EIA said.

“At current injection rates, it is becoming increasinglyuncertain whether or not ready supplies of gas will be availableduring the heating season in sufficient quantities to avoid sharpupward 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 AlliancePipeline from Canada to be of much help in easing the U.S. supplycrunch this winter. “Assuming that it will take several monthsbefore Alliance reaches its full capacity of 1.3 Bcf/d, thatpipeline may not fully contribute to advancing new gas suppliesuntil the heating season is nearly over. Even if Alliance is nearcapacity at mid-winter, it is likely that a substantial portion ofthe volumes contracted for delivery on the system will have beende-contracted from other systems, particularly TransCanada PipelineSystem. Thus, it is an important question as to just howsignificant Alliance will be with respect to net new supply fromCanada.”

Overall, natural gas demand is expected to average about 5.74Tcf for the fourth quarter, and rise to 7.22 Tcf in the firstquarter of 2001, according to the EIA. It estimates that gas willfinish out 2000 with a demand rate of about 22.2 Tcf, up 4% from21.36 Tcf a year ago.

Susan Parker

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