Given the huge overhang of natural gas in storage at the end of November, the Energy Information Administration (EIA) has adjusted its prior-month forecast for spot gas prices “somewhat downward” to about $2.15/Mcf for the winter heating season. This is two-thirds lower than the average of $6.48/Mcf for last winter, and about 43 cents below the EIA’s November forecast for winter prices.

“With two months of below-normal heating demand so far this season, the radical transformation of natural gas market conditions from an upwardly explosive price situation last winter to a price-cratering supply overhang this season is nearly complete,” the Department of Energy (DOE) agency said in its Short-Term Energy Outlook for December, which it released Thursday.

“The sharp downturn in domestic gas-directed drilling rates since July, which will probably have important implications for market prices by 2003, will probably not reduce natural gas productive capacity enough to prevent relatively lower prices this winter and through most of 2002,” the EIA said. “The (quite robust) amount of demand growth we are currently projecting for 2002 (an increase of 1.36 Tcf, or 6.3%) will probably do little more than return natural gas inventories to normal. Thus, pressure on domestic wellhead prices to remain near (and at times below) $2/Mcf will be strong through much of 2002.”

The EIA’s pessimistic price forecast for the near term is based largely on the “abnormal” storage level, which was 29% higher at the end of November (at 3.16 Tcf) than it was last year at that time. This has been caused by the unseasonably warmer weather so far this winter, which has resulted in lower demand.

Heating-season temperatures up to now have been far above normal, the EIA noted. If temperatures are normal for the remainder of the winter season, the agency projects that overall demand for natural gas will decline by 5% compared to a growth of 6.7% last winter. Residential and commercial demand for gas is expected to be lower than last winter’s levels by 10.3% and 6%, respectively, it said.

The news on the price front for residential customers this winter is good. The EIA believes that gas-heated households can expect a 35% reduction in their heating bills over the course of the winter season, while households using propane or oil for heating are likely to see a 29% drop in their bills.

Although current price conditions favor the use of natural gas, the EIA predicts that the demand situation will not “improve appreciatively” until the second quarter of next year due to the current economic slowdown. When the final numbers are tallied, it anticipates gas demand for 2001 will be down 4.4% due in large part to the downturn in gas-intensive industrial production.

Adding to the already bulging supplies, the agency projects that domestic gas production is likely to grow by 2.7% during 2001, compared to only 0.8% last year, and then will be flat in 2002. Gas imports — mostly from Canada — are expected to rise by about 6.7% this year and fall flat in 2002.

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