Despite the sharp downturn in domestic gas-directed drilling rates since July, there will probably not be enough of a reduction in natural gas productive capacity to prevent relatively low prices this winter and through most of 2002, but reduced drilling could have important implications for market prices by 2003, according to the EIA’s Short-Term Energy Outlook –January released on Tuesday.

Due to the Energy Information Administration’s (EIA) recent gas demand growth projections for 2002 — an increase of 1.2 Tcf, or 5.5% — natural gas inventories will probably return to normal. According to the government agency, pressure on domestic wellhead prices to remain near $2/Mcf will be strong through much of 2002. In 2003, the EIA expects the rebound in economic growth should result in further demand growth of about 2% and “somewhat higher spot gas prices,” averaging around $2.70/Mcf.

“Although prices at the wellhead may increase as the weather gets colder, we believe that large price gains are unlikely this winter, given the high volume of gas presently in storage,” the EIA said in its outlook. “Working gas in underground storage at the end of November was 30% above last year’s level. Due to the warm weather, which lasted up to the middle of December, we estimate that working gas in storage was 66% above the previous year’s end-of-year level at the end of 2001.”

In the EIA’s base case, the organization projects that natural gas wellhead prices will peak at about $2.50/Mcf, then fall throughout the latter part of this winter. One year ago, natural gas spot wellhead prices averaged well above $8/Mcf in response to cold weather and critically low inventories. EIA said it is unlikely that there will be another run-up in commodity prices this year because the nation currently has a strong level of petroleum inventories combined with tepid petroleum product prices, which will help lower the forecasted ceiling for natural gas prices should the winter turn harsh, particularly in the electric power sector.

Taking into account all of 2001, natural gas demand is estimated to have declined by 5.3%. Even though the EIA estimates that residential demand declined for 2001, based on weak heating-related demand in the fourth quarter, the organization’s data shows that the overall demand decline was mainly the result of the downturn in industrial production. In contrast, gas use for power generation increased by an estimated 4.1% in 2001, entirely because of increased use by non-utility generators.

“We now expect domestic natural gas production to fall by about 400 Bcf in 2002 (2.1%) and to recover to about 2001 levels in 2003,” the EIA said. “Production increased approximately 1.7% in 2001. After reaching a high of 1,058 rigs drilling during the month of July, the rig count has been falling since then, due to the drop in natural gas prices and declining industrial demand. Net imports of natural gas are projected to rise slightly in 2002 but should exhibit solid growth (about 10%) in 2003 as import capacity expands.”

Helping the production fall off this winter has been the unseasonably warm weather so far. Warmer than normal temperatures during most of the fourth quarter allowed withdrawals from storage to be delayed. The organization pointed out that if temperatures are assumed to be normal for the rest of the winter, then heating degree-days for the entire 2001-2002 winter season would come in about 14% lower than last winter. Due to this expectation, winter demand for natural gas is projected to decline by 7.3% compared with growth of 6.4% last winter. The EIA also projects that residential and commercial demands for natural gas will be lower than last winter’s levels by 14.3% and 7.9%, respectively.

The EIA also found that 2000 witnessed the sharpest annual increase in aggregate energy expenditures in the United States in 20 years. “Nominal expenditures for energy throughout the economy increased by about 29% between 1999 and 2000,” the EIA said. The organization noted that the average rate of growth in nominal energy expenditures between 1987 and 1999 was 3%. “On average, the higher expenditure level was maintained in 2001.” Going forward, the outlook for 2002 suggests a drop in nominal expenditures of about 11%, putting them back at trend levels. “While expenditures as a percent of GDP spiked sharply in 2000, for the 2002-2003 period the expenditure share appears headed for the declining trend line observed since the early 1990’s.”

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