What a difference a month has made in terms of easing the fears about a natural gas supply shortage and escalating prices, according to the Energy Information Administration’s (EIA) short-term energy outlook for August.

The chance of gas storage levels reaching the “normal level” of 3 Tcf by the start of the winter heating season this fall “now looks good,” and the average wellhead price is projected to be $4.63/Mcf for the entire third quarter, with little or no movement upward to the $5-5.60/Mcf range anticipated until December or January, the EIA said in its latest report issued Wednesday. The EIA revised its third-quarter price forecast downward from $4.73 a month ago.

Due to significant storage injections last month, gas inventories stood at about 2.1 Bcf at the end of July — only 17% below the end-of-July level of a year ago and about 9% less than the previous five-year average, according to the Department of Energy (DOE) agency. This is a “solid gain in storage levels and bolsters the chance that natural gas inventories may return to normal by the start of the heating season…A good chance [also] exists for spot prices for natural gas at the Henry Hub to remain below $5/MMBtu for the remainder of the summer.”

The EIA credited the “relatively mild weather” this summer across much of the nation for the lower gas prices. “Cash prices at the Henry Hub, which had hovered considerably above $5/MMBtu on a monthly basis since the beginning of the year, fell below $4.70/MMBtu during the last week of July. Only two months ago that price topped $6/MMBtu.”

One factor that could alter the progress in reaching a 3 Tcf storage level this year “would be a hot remainder of the summer, particularly in the Western and South Central regions, where natural gas is heavily used in the electric utility sector to meet cooling demand,” the EIA said.

The agency also revised downward its forecast for the average annual wellhead price this year to below $5/Mcf, which still is about $2/Mcf more than the average price for 2002. In 2004, it sees annual wellhead prices easing by approximately 16%, “as supplies are expected to remain sufficiently strong to return storage levels to within normal bounds, assuming normal weather.”

Despite its downward price revisions, the EIA cautioned that a “prolonged period of colder-than-normal weather in October and especially November could tighten the market enough to send prices above $6/Mcf.”

Summer gas demand is expected to be 1.7% lower than last summer’s level due to price-induced demand destruction in the industrial and power generation sectors and cooler weather, the EIA said. Gas prices for the season are projected to be 40% higher than a year ago as a result of tighter supplies.

On an annual basis, gas demand is expected to rise by 0.6% in 2003 to 22.57 Tcf as a result of the “sharply higher weather-related demand” seen during the first quarter, the agency noted. A slight demand rise to 22.68 Tcf is anticipated in 2004.

The EIA sees gas production increasing by about 3% this year. It projects an average gas wellhead price of about $4.07 for 2004, “partly based on our belief that natural gas production will rise modestly in 2003 and remain close to improved levels in 2004.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.