Against the backdrop of high levels of natural gas storage injections over the past two months and lower demand levels, the Energy Information Administration (EIA) recently projected that average natural gas wellhead prices will decline this spring and summer, averaging $4.14/Mcf. Although this latest projection represents a significant downward revision of about 50 cents/Mcf from EIA’s previous outlook, the Department of Energy agency continues to believe that it may be a while before wellhead prices return to the level of under $2.50/Mcf seen a little more than one year ago.

In its Short-Term Energy Outlook for June issued last Thursday, the EIA noted that high storage injections during April and May and lower demand have led to a higher than previously anticipated storage build thus far, causing spot gas prices to fall in May to under $4/Mcf currently. The agency said contributing factors in these events have been the relatively mild weather in most of the U.S. and also lost demand in the industrial and utility sectors. Electric utility demand for natural gas is estimated to have fallen by an average of about 16% in the first five months of 2001 from year-ago levels, EIA noted, as electric utilities have turned away from gas in favor of other fuels due to high prices. Industrial demand growth, which was generally flat or negative in the first four months of this year, began to turn around in May as gas prices fell and the differential between gas and fuel oil prices narrowed, the EIA added.

But the advent of higher temperatures in regions that use large amounts of gas for power generation could raise the competition for gas supply between cooling and storage sources and lead to the resurgence or at least stabilization of gas prices, the EIA went on to note. According to the EIA, spot natural gas prices at key regional market points havecome down dramatically since the spikes of December 2000/January 2001. But Southern California border prices remained the highest in the nation in May, averaging $12 per thousand btu. The EIA said that factors that may keep gas prices from resurging toward higher levels this summer include the likelihood that conditions will be cooler in Texas this summer than last summer and the tendency for new gas-fired generating plants installed since 1999 to be more efficient than average existing plants.

Meanwhile, the EIA said that although storage levels started out this year on the low side, recent mild spring weather throughout much of the United States, along with the lower market prices, have led to a higher than anticipated underground storage build. In fact, the agency continued, storage injections hit record highs in April and the first part of May. The EIA said that gas that would have been used for heating if the spring weather was cold, or for generating electric power if the weather was hot, was injected into underground storage. The EIA said that for the spring and summer, average wellhead prices are projected to decline, averaging $4.14/Mcf. The agency acknowledged that this represents a “sizeable downward revision” of about 50 cents per Mcf from the EIA’s previous report. “Nevertheless, we continue to believe that it may be a while before wellhead prices revisit the level of under $2.50 per thousand cubic feet exhibited a little over one year ago,” the EIA stated. In 2001, the agency said that the annual average wellhead price is projected to average about $4.75/Mcf, while for the year 2002, EIA expects the storage situation to improve somewhat and with that, the agency expects a decline in the average annual wellhead price to $4.24/Mcf.

Looking at natural gas demand and supply, the EIA said that U.S. natural gas demand is projected to grow by 1.8% this year, compared with estimated 5% growth in 2000. The agency noted that this is mainly due to the somewhat slower economic growth this year. Also, the negative impact on gas demand of high prices at the beginning of the year and the likelihood that weather-induced demand increases will be smaller this year — particularly in the second half of the year — contribute to lower demand growth in 2001, according to the EIA. Growth in 2002 is expected to rise by another 3.4% as the economy picks up again from its dip in 2001 and as new gas-fired power generation requirements continue to mount, the EIA added.

The agency said that based on EIA survey data and recent information from the American Gas Association on early-season storage additions, EIA estimates that working gas in storage at the end of May was 1,494 bcf. The EIA said that continued high storage injections are expected for the remainder of the summer, while gas storage levels at the beginning of the heating season are expected to be higher than they were at that time last year.

Meanwhile, the EIA outlook noted that domestic gas production for 2001 and 2002 is expected to rise as production responds to the high rates of drilling experienced over the past year. The agency went on to note that according to Baker Hughes, the gas rig count rose to 1,030 during the week ending May 25, an all time record high. Production is estimated to have risen by 2.4% in 2000 and it is forecast to continue to increase by 3.4% in 2001 and 3.1% in 2002. Net imports of natural gas are projected to rise by about 11% in 2001 and by 5.8% in 2002, the agency added. Forthis summer, EIA projects that natural gas imports will be 14% above last summer’s as demand for storage refillis expected to be high.

Turning to electricity, the EIA said that total annual electricity demand growth is projected at about 2.5% in 2001 and 2.2% in 2002. This compares with estimated demand in 2000 that was 3.3% higher than the previous year’s level. Electricity demand growth is expected to be slower in the forecast years than it was in 2000, partly because economic growth is slowing from its higher 2000 level, but in 2002, the assumption of normal weather causes slower growth in residential demand compared with the two preceding years, the EIA added. Industrial demand for electricity is expected to be down in 2001 but revive in 2002 along with the economy, the agency added.

The EIA said that this summer’s overall cooling degree-days (CDD) are projected to be 2.6% above normal, based on April and May temperatures, or about 1.5% above last summer’s CDD total. Summer electricity demand is expected to be 2.2% higher than last summer based on economic factors as well as weather, according to the agency. The EIA said that hydropower generation in the crucial Pacific Northwest is expected to be down by 7.5% from last summer, due mainly to lower water levels. The EIA noted that according to the National Oceanic and Atmospheric Association, this winter was the second driest winter on record. In addition, California electricity needs during the past winter further drained reservoirs, depriving the region of hydroelectric generation resources for this spring and summer.

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