Even prior to last week’s massive storage withdrawal of 162 Bcf and $5-plus January futures prices, the Energy Information Administration (EIA) had tacked on another 46 cents/Mcf to its first quarter 2003 natural gas wellhead price forecast compared to last month’s prediction in its Short-Term Energy Outlook. In the latest Outlook, EIA said it is expecting first quarter prices to average $4.16. It also raised its price forecast for all of next year to $3.69/Mcf from its prediction last month of $3.37.

EIA said the severe cold in November put a significant dent in the natural gas storage surplus, and given normal weather for the rest of the winter, supply could be lower than previously expected, causing higher prices. That may turn out to be somewhat of an understatement given that working gas levels in storage already are 444 Bcf lower than at the same time last year and prices already have spike above $5.

“Due to low temperatures and higher heating demand, storage was about 9% lower at the end of November than it was at that time last year,” EIA noted. “Natural gas prices are poised to rise beyond already high levels through January and February, unless there is a profound turnabout in the weather over the next month or two. Assuming a normal winter for the remainder of the heating season (December through March), we project that natural gas wellhead prices this winter (October through March) will average around $3.90/Mcf, about $1.50/Mcf, or 60%, above last winter’s price.”

For 2002, EIA expects the annual average natural gas wellhead price to be close to $3.00/Mcf compared to more than $4.00 last year. In 2003, wellhead prices are projected to show an increase of about $0.70/Mcf. “This projection is based on the expectation of lower volumes of underground gas in storage for all of next year compared with this year and continued increases in demand (particularly in the first quarter) over 2002 levels.”

Although its higher price forecasts may give the bulls a little something to run with, a startling 1 Tcf revision to EIA’s demand data could either trigger something resembling a stampede or force observers to step back and reconsider their actions based on EIA data. For this month’s Short Term Energy Outlook, EIA began revising its data using different surveys to get a better handle on demand from electric power generators. What it found was a 1 Tcf/year increase in gas demand.

“The demand levels in the recent historical data have been adjusted upward by about 1 Tcf/year (approximately 5%), representing a correction to undercounting of deliveries to power generating facilities (other than electric utilities) in the data collection system used to report natural gas supply and demand in EIA’s Natural Gas Monthly (NGM) and Natural Gas Annual (NGA),” EIA explained. “The next release of the NGA (January 2003) and later issues of the NGM (probably beginning in March 2003 with the first release of January 2003 data) will also reflect these revisions.”

EIA’s David Costello said in an interview that EIA had been collecting data mainly from pipelines and suppliers for its monthly survey and outlook, but had not been surveying consumers. The large “balancing items” which EIA uses to account for discrepancies between its supply and demand numbers, forced EIA to consider alternatives to its traditional surveys.

“It turns out that some of the big unaccounted for [balancing items] that have been cropping up in recent years basically have been the result of not covering completely deliveries to some of these nonutility facilities,” Costello added. He said the data from nonutility generators had been collected annually and not integrated with other monthly demand data.

The new revisions serve to offset some of these recent discrepancies between reported supply and demand. However they also significantly change historical data. In fact, natural gas demand for 2001 was revised upward to 22.41 Tcf from 21.32 Tcf. Similarly large changes were made to data all the way back to 1989.

However, even with the revisions, EIA’s supply and demand projections for the whole of 2002 still yield an annual imbalance of -940 Bcf (excess of reported supply over reported/estimated demand), which is about 4% of total demand. (In its monthly data without the revisions, the imbalance has grown to nearly 2 Tcf.)

Using the revised demand data, however, EIA still expects total natural gas demand for 2002 to decline by 0.9% from the 2001 level. “Overall weakness in the industrial sector, particularly in the first half of the year, will prevent a posting of positive growth,” the agency said. “Solid growth in natural gas demand of 4.0% seems likely in 2003, especially if the industrial sector as a whole expands significantly as expected.”

Under normal weather conditions through the forecast, storage is expected to remain near or slightly above the previous five-year average level at least through the beginning of the next heating season, EIA predicted. (However, according to last week’s storage report, working gas levels already have fallen to 82 Bcf less than the five-year average.)

Domestic dry natural gas production is projected to fall by about 1.6% in 2002 compared to the 2001 growth rate of 2.4%. In 2003, production is expected to rebound by about 2.7% as demand rises and inventories fall back closer to normal.

Natural gas-directed drilling, while still down relative to the peak seen in mid-2001, remains strong in the longer historical perspective, EIA said. Aggregate lease revenues from domestic oil and natural gas production are expected to average $337 million per day in 2003, which would be an 18% increase over the average rate seen in 2002. The leverage from these revenues should drive continued strong drilling levels in 2003, EIA predicted.

©Copyright 2002 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.