In its latest energy forecast, the Energy Information Administration (EIA) slightly lowered its predictions for gas supply this year mainly due to expectations of lower imports. It marginally raised its gas demand forecast and added a penny/Mcf to its outlook for expected average wellhead prices this year, which are now at $2.79/Mcf compared to $4.12 last year.

In its September Short Term Energy Outlook, EIA actually raised its expectation for domestic dry gas production this year by 130 Bcf to 19.12 Tcf compared to last month’s forecast. Production still is expected to be down 1.7% this year from last year. Imports are expected to be down 8.8%. EIA cut its import forecast for the year by 190 Bcf from last month’s number to 3.3 Tcf. Total new supply is expected to be down 2.7% to 22.54 Tcf, which is 60 Bcf lower than its August forecast.

Meanwhile, total demand is expected to be up 3.3% this year to 22.13 Tcf, or about 40 Bcf more than what EIA forecast in last month’s short-term outlook. The main factor contributing to the increase was a higher expectation for industrial demand — up 9.6% this year, or 220 Bcf more than in the August forecast.

“While natural gas in storage remains ample, sharp increases in natural gas demand are likely this winter, largely because of the high probability of comparatively cold weather, but also because of the continued expectation of solid recovery in the U.S. industrial economy by the fourth quarter of this year and into 2003,” EIA said. “The expected increase in natural gas demand for the coming winter is 12% above the year-ago level. Much of the accumulated cushion in natural gas storage will probably be expended toward feeding consumption growth. While severe price spikes are unlikely, the prospect for continued demand strength for the industrial and power sectors of the economy should lend above-average support to spot natural gas prices.”

EIA added 23 cents to its average wellhead price forecast for 2003 because of expectations for less production and more demand next year than it predicted in its August outlook.

“This winter, we expect to see natural gas wellhead prices averaging around $3.20/Mcf, or about $0.80/Mcf above last winter’s price,” EIA said.”For all of 2003, the average natural gas wellhead price is projected to be about $3.28/Mcf compared to $2.80 [this] year.”

EIA noted that last month’s unusually hot weather across the nation diverted some gas away from storage injections to electricity generating plants to meet the above-normal cooling demand. Now that the summer is nearly over and cooling demand is tapering off, while at the same time the heating season has not yet begun, higher natural gas injection rates are expected, the agency said.

EIA also mentioned that an unusually hot September or cold October could divert gas away from storage injections hindering the industry’s ability to reach the 3-3.2 Tcf level, which is generally considered adequate to meet winter demand without large price spikes.

Working gas in storage has remained above the previous five-year average since the beginning of the year. By the end of August, working gas was about 8% higher than last year and about 12% above the five-year average. Working gas levels on Aug. 30 were at 2,774 Bcf or about 200 Bcf higher than a year ago, and over half of that surplus is in the producing region.

Storage is expected to remain above average levels at least through the beginning of the next heating season, EIA predicted.

Domestic dry natural gas production is projected to fall by about 1.7% in 2002 because lower gas prices have reduced production and resource development incentives from the highs of last year. In 2003, production is expected to rebound by 3.2% as demand rises and storage inventories fall back closer to normal. Baker Hughes reported average active rigs drilling for natural gas in August at 721, or 43% below the year-ago level. Aggregate lease revenues from domestic oil and natural gas production are expected to move up this year and settle at about $330 million per day in 2003, which would be a 30% increase over the rates seen at the end of 2001, EIA said.

“Inasmuch as these revenues are a strong determinant of industry cash flow, which in turn is a powerful driver of drilling activity levels, an upward trend in drilling levels generally (and natural gas-directed drilling in particular) is anticipated for this year and into 2003,” EIA said. “Thus, natural gas drilling appears to be in the early stages of a renewed upswing in activity.”

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