Rising oil prices, a relatively cooler March and April, an improving economic picture and a production decrease all contributed to higher than expected natural gas prices over the past few months, the Energy Information Administration (EIA) said in its monthly Short-Term Energy Outlook released last Monday.

EIA noted that the rising natural gas prices, which have hovered above $3.00/Mcf since March, run counter to the usual price drop-off during the shoulder months between the winter and summer peaks. Other factors that may have come into play, EIA said, are the brief, but intense, heat wave during April and the increase in gas demand for power generation, as new gas-fired generating plants came on line.

EIA projects that, assuming normal weather and without supply disruptions, gas prices are expected to average about $2.93/Mcf this year, compared to over $4.00/Mcf last year.

The Energy Department agency projects natural gas demand in 2002 will increase by 2.8% over last year, with summer gas demand 4.4% above last summer’s level, “due mainly to the fall in natural gas prices since a year ago and the slowly reviving economy.” The projection assumes total electricity demand about equal to last summer’s demand. Cooling degree-days for the cooling season are assumed to be somewhat lower than last year. “Also, although the economy is assumed to be growing through the summer months, year-over-year increases in industrial output are not expected to show up until the third quarter of this year.”

As for a key driver, oil prices, “it is expected that OPEC’s production cuts and other market fundamentals will continue to push world oil prices up.” EIA said it has been confirmed that OPEC countries have reduced production an estimated 900,000 bbl/d during January-April 2002. The agency appears to be of two minds about continued production cuts, noting first that cuts will force prices up, and then advising “efforts to improve compliance leveled off in March and April, and more OPEC production is expected in the coming months.

“OPEC quotas have been set a very low levels, the result of repeated OPEC 10 quota cuts totaling over 5 million bbl/d over the past year,” EIA said. “As a result OPEC is now in a situation in which world oil markets could tighten and oil prices rise, despite little or no demand growth and large increases in non-OPEC production.

“OPEC ministers have recently begun to echo this sentiment. Saudi Arabian Oil Minister Ali Naimi suggested that while the level of oil stocks is ‘fairly good’ now, ‘that does not mean a month or two months from now it’s going to be good, and we will probably have to take action to increase the supply side.'” World oil prices have risen $2/bbl on average from March levels.

On the electric side, total electricity demand this summer is expected to be about equal to last, with a cooler summer and increased hydropower on tap, EIA said. Increases in industrial use are not expected to show up until the third quarter of this year, and cooling degree days for the cooling season are assumed to be somewhat lower than last year. In the meantime total hydropower, which was at a near-30 year low last year, “is expected to rise by 22% if normal precipitation materializes in the Pacific Northwest, the main region affected.”

The Energy Department’s tracking agency expects total oil-fired generation to be down considerably due to higher prices, while total gas-fired generation is projected to be about 1.6% above last year. While U.S. demand in 2002 is expected to be flat, EIA is predicting 2.9% demand growth (retail sales plus industrial generation for own use and other direct sales) in 2003.

On the nuclear generation front, “the prospect for normal operations appears likely.” Corrosion damage found on a reactor head at the Davis Besse plant in Ohio had raised fears that other similar units across the country could have the same problem. Following a Nuclear Regulatory Commission survey, it now appears that is not the case. While Davis Besse is being repaired, the power market will gain from upgrades of capacity at other plants ranging from 2% to 20% and totaling several hundred megawatts in each year of the projection. “Nuclear generation is expected to be up by about 0.6-0.7% in 2002 and 2003.”

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