Assuming the weather cooperates, spot natural gas prices are expected to average about $3.12/Mcf next winter, up about 70 cents from prices during last year’s heating season, but “only” 10-15% higher than current gas prices, according to the Energy Information Administration (EIA). It projects the annual gas price will average about $2.78/Mcf, down significantly from the year-ago level of $4 and down 11 cents from its July forecast. EIA also lowered its 2003 price forecast 20 cents to $3.02.

A major factor affecting price performance will be the weather and it impact on storage levels over the upcoming months. “The months of September through November bear particular scrutiny…A hotter-than-normal September or colder-than-normal weather for October and/or November will eat into storage and thus drive up the prices. Conversely, milder-than-normal weather in those months could send spot gas prices reeling, even into the winter, especially given the current cushion of working gas in storage,” the EIA said in its Short-Term Energy Outlook for August, which was issued Thursday.

It signaled that the marked volatility in spot gas prices, which have been “weaving above and below $3 per Mcf since mid-March,” may be at an end for a while. The “sharp volatility…has recently become calmer now that the summer is more than half over and a clearer picture of the likely winter storage situation emerges,” the Department of Energy (DOE) agency said.

At the end of July, it estimated working gas storage had reach about 2.6 Tcf, which was about 330 Bcf more than a year ago and 17% above the five-year average. “Storage is expected to remain above average through the beginning of the next heating season.”

The EIA revised its projection for growth in annual gas demand upwards to 3% over 2001 levels largely due to “higher [than] expected demand figures for electric power” for 2002. It estimated total gas demand for the year will be 22.09 Tcf, compared to 21.45 Tcf in 2001. Gas consumption will grow at a slower pace of 2.8% in 2003, the agency believes.

For the summer months, “natural gas demand is now projected to be 4.6% above last summer’s level, rather than the 3.6% [that was] projected” by EIA in July, according to the agency. “Growth is due partly to the fall in natural gas prices since a year ago and the slowly reviving economy.”

At the same time, the EIA said it expects annual domestic gas production to fall by about 2.3% for 2002, compared to the growth rate of 2.4% seen in 2001. “Lower natural gas prices have reduced production and resource development incentives from their highs of last summer. Still, current supplies, including natural gas in storage, appear to be at very comfortable levels.” It sees gas production rebounding by 3.9% in 2003 as demand rises.

Gas drilling has “fallen significantly” from the peaks witnessed last July, the EIA noted. Baker Hughes reported that average rigs drilling for natural gas in July were at 716, which is 48% below the year-ago level, it noted. On the bright side, the EIA said “the posting of 729 rigs during the week of Aug. 2 was 23% above the recent low of 591 posted for the week of April 5.”

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