Although natural gas spot prices rallied to above the $3 mark in late October and early this month, the Energy Information Administration (EIA) says the “fundamentals are simply not there for a significant sustained rebound in prices” to occur this year and next.

Relatively low storage injections in recent weeks, a steady drop in drilling activity since July, and forecasts of below-normal temperatures for fall and winter “have apparently engendered a generally bullish sentiment among gas market participants” lately, but the “fundamental rationale for prices above $3/Mcf is lacking,” the EIA said in its short-term energy outlook for November, which was released Tuesday.

“Therefore, we believe that some correction is likely and that prices over the next five months should remain in the $2-3 range, with prices easing toward the lower end of that range during the off-season in 2002,” the Department of Energy (DOE) agency said. For this winter, it predicts spot prices will average about $2.58/Mcf, which is two-thirds below the average of $6.49/Mcf during last year’s heating season.

The DOE agency said it doesn’t anticipate a “substantial strengthening” in gas prices until early 2003.

The relatively low gas prices will continue through 2002 due mostly to weakened industrial demand and bulging inventories that are “likely to continue throughout the winter, assuming normal weather and barring any major supply disruptions,” the EIA report said.

At the end of October, working gas inventories were estimated to be 17% above (at 3.14 Bcf) last year’s level, and are likely to expand further during the winter heating season, the agency noted. By the end of February 2002, working gas inventories are projected to be more than 60% ahead of the level seen in the year-earlier period, it said.

As a result of the bulging gas stocks, EIA predicts spot prices for 2001 will average about $4.16/Mcf, but drop to almost half that level for 2002, “We expect inventories to remain at relatively high levels and, therefore, we expect the average annual wellhead price to [be] about $2.20/Mcf,” in 2002.

All of this is good news for homeowners that use natural gas. The DOE agency estimates the total heating bill this winter for an average gas-heated household will be $626, a drop of 32% from last winter.

On the consumption side, EIA said the “depressed natural gas demand situation is not expected to improve appreciatively until 2002, due to lowered assumptions about economic growth for this year.” It sees total demand for 2001 falling by 3.3% due largely to the softened consumption by the industrial and utility sectors, which is expected to be down by 3.8% and 13.5%, respectively, this year over 2000.

The heating degree-days this winter are assumed to be normal, or 7.8% lower than last winter. “Thus, winter demand for natural gas is projected to decline by 2.9% compared with growth of 6.3% last winter. Residential and commercial demand for natural gas is expected to be 6.6% and 5.5%, respectively, lower than last winter,” the EIA said. In addition, demand by electric utilities and industrials is forecast to fall off during the fourth quarter.

On the supply front, the EIA said it sees domestic gas production growing by 1.4% this year and by 1.3% during 2002. “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 falling industrial demand.” Net imports, however, are anticipated to rise by about 3.1% in 2001 and by 3.3% next year, it noted.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.