With end-of-March storage at the lowest level since it began keeping records in 1976, the Energy Information Administration (EIA) in its short-term energy outlook for April said the gas markets will require a combination of high spot prices during the spring and summer, strong gas drilling and development activity and normal summer weather in order to achieve normal inventories by next winter. Absent these conditions, it believes the market could see a new round of gas price spikes during the 2003-2004 heating season.

In its outlook released last Tuesday, the Department of Energy (DOE) agency indicated market conditions may be favorable to sufficiently refill storage by the end of the year. For one, it projects the annual average wellhead price for gas will rise by about $1.57/Mcf to $4.52/Mcf based largely on the expectation of lower gas storage for most of the year, which should spur drilling.

In addition, the agency predicts summer gas demand should be unchanged due to reduced cooling demand that will be offset by expected growth from the industrial sector. It anticipates cooling degree-days during the summer months (second and third quarters) will be almost 10% below year-ago levels, indicating perhaps a less humid summer. This could make more gas available for storage refill.

However, “in the event of a hotter than normal summer, natural gas prices would jump as cooling demand would compete with the need to build storage inventories,” the EIA said.

The agency also sees drilling picking up this year. Natural gas production, which fell by about 2.6% in 2002, is likely to increase by 1.5% this year, according to the DOE agency. “High natural gas prices and soaring oil and higher natural gas field revenues are expected to drive a resurgence in natural gas-directed activity this year following a downturn in 2001,” the EIA said, adding that it sees gas drilling being pushed even higher in 2004.

“The prospects for significant reductions in natural gas wellhead prices over the forecast period from the current high levels could hinge on the productivity of the expected upsurge in drilling in terms of expected output. With demand expected to outpace production growth, natural gas imports are expected to rise” throughout the year, it noted.

Another key factor that could affect gas storage, and ultimately gas prices, is the continued tight oil markets, the EIA said. It projects that oil inventories may continue to be tight until the Iraqi and internal Nigerian conflicts are resolved.

Working gas in storage was estimated at 696 Bcf at the end of March, about 54% below the year-ago level and the lowest end-of-March figure recorded by EIA in 27 years, the agency said. Eastern and producing region stocks are especially low. “Demand for natural gas to refill working gas storage in 2003 will be larger than average, which means that price volatility can be expected to continue…However, storage injections were already started by mid-March due to generally warmer temperatures. This marks the earliest start to the refill season since 1994.” The storage injections were short-lived, however, with industry withdrawing a net total of 9 Bcf during the first week of April.

While spot gas prices have “declined significantly” since February, they still remain “historically and unseasonably high,” hovering around $5/MMBtu due to tight gas inventories. EIA credited the easing in prices to the positive net storage injections that were seen during the last two weeks of March. It anticipates spot prices will stay above the $4 level throughout the entire year.

Despite higher gas prices, the EIA expects gas demand this year to rise 2.7% over 2002 based on expansion in the industrial sector. It noted demand in the first quarter alone was up 6.7% as a result of colder weather.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.