With working gas in storage expected to hit a record end-of-season low, gas demand slated for solid growth this year and production projected to rise only marginally, the Energy Information Administration (EIA) in its short-term energy outlook for March predicts that the annual average price for wellhead natural gas will be a record high in 2003.

In its report issued on Thursday, the Department of Energy (DOE) agency forecasted that 2003 prices will climb $1.90/Mcf above year-ago levels to $4.80/Mcf on an annual basis, which would be a “record in both nominal and real terms.” The EIA said its bullish price projection was based on an expectation of lower volumes of underground gas in storage throughout the entire year compared to 2002, high oil prices, continued increases in overall gas demand (particularly in the first quarter), and “substantial growth” in industrial demand during 2003.

The high spot gas prices that the market has seen in the past couple of weeks have “abated” somewhat, but they still remain “well above” the $7/Mcf level due to low gas inventories, and are likely to “stay high well into spring,” the EIA said. It estimated that wellhead gas prices for the most recent heating season averaged about $4.45/Mcf, which is $1.90 (79%) above last winter’s price.

Working gas in storage fell to about 838 Bcf at the end of February, and is expected to close out the heating season at 675 Bcf, eclipsing the previous end-of-season low of 741 Bcf set in 2001, according to the agency. This would be 56% below the working gas that was in storage a year ago, the EIA said, adding that “demand for natural gas to refill working gas storage in 2003 will be larger than average” as a result. Gas stocks are particularly low in the eastern region of the country.

This could set the stage for “significant price volatility” in the gas market in the months ahead, it noted. “With the above-normal requirements for storage re-injection now looming on top of expected increases in consumption, the United States is going to need as much new supply as it can get to promote short-term market conditions conducive to lower and more stable natural gas prices by next winter.”

The EIA projects that gas demand will rise 3.7% during 2003, “particularly if the industrial sector as a whole expands significantly as expected,” and will continue to rise in 2004. It pegged gas demand this winter at almost 9% above that seen in the winter of 2002.

At the same time, gas production, which fell by about 2.8% in 2002, is expected to only “increase marginally” by 1.2% during the current year, the DOE agency said. It noted, however, the higher gas prices and “soaring oil and gas field revenues” are likely to spawn a resurgence in gas-directed drilling this year, which could reach “near or beyond the high levels seen in 2001” by 2004 if the strong prices and demand hold.

Domestic production growth should accelerate in 2004, the EIA said, “but, given recent experience, the extra effort might not result in increases above 2%.” The prospect for “significant reductions in natural gas wellhead prices over the next two years from the current high levels could hinge on the productivity of the expected upsurge in drilling in terms of expected output.”

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