Bolstered by the prospects of strengthening demand and more manageable storage stocks, the Energy Information Administration’s (EIA) latest forecast calls for spot gas prices to average around $3.54/Mcf going into the winter season, or about $1.12/Mcf above last year’s level. This is 20 cents above the price projection that the agency made in October for winter gas.

Still, gas prices for the entire year will only average about $2.92/Mcf, significantly below the $4 price average seen in 2001, the EIA said in its Short-Term Energy Outlook for November, which was issued Friday. The agency’s outlook is more favorable in 2003, with gas prices expected to gain about 45 cents/Mcf over 2002.

The EIA boosted its price projection for this winter due partly to its belief that gas demand in the residential and commercial sectors will see a year-over-year hike of 13.2% during the last six months of 2002. “Below-normal temperatures in both the Northeast and the Midwest so far this winter have bolstered prospects for a strong close to 2002 for natural gas demand,” it said.

This compares to a decline in gas demand during the first half of the year of 5.2% (610 Bcf), the EIA noted, adding that nearly half of the reduction was due to “weather effects in the residential and commercial sectors.”

Still, when all is said and done, the agency said it anticipates that consumption of natural gas will grow by only 1.1% for the entire year due to the “weakness” in the industrial sector. “Moderate strength in natural gas demand seems very likely in 2003…if the industrial sector as a whole expands significantly as expected,” the EIA noted, but it did not offer a percentage estimate for that growth.

The level of gas in storage was estimated at 3.15 Tcf at the end of October, which is “about the same level as [a] year ago,” but about 6% higher than the previous five-year average, the agency said. This will ensure adequate gas supplies for the heating season and “fairly stable natural gas prices” during the winter months, it believes.

On the supply side, the EIA sees domestic gas production slipping by about 1.3% for the entire year, compared to a growth of 2.4% in 2001, due to lower gas prices. “However, in view of the fact that…gas demand levels are underreported, current supplies appear to be in good shape. This is, in part, evidenced by the still-high natural gas storage levels, which have been maintained despite strong electricity-related demand increases during the third quarter. In 2003, production is expected to rebound by well over 2% as demand rises and inventories fall back to closer to normal,” it said.

“Natural gas-directed drilling, while still down relative to the spectacular peak seen in mid-2001, remains strong in the longer historical perspective. However, the gas-directed rig rate slipped a bit last week and was generally down for the month of October,” the EIA said. Baker Hughes reported average active rigs drilling for gas as of Nov. 1 at 692, down from 710 in the previous week.

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