Fueled by growing industrial and power demand for natural gas and the prospects for a cold winter, the Energy Information Administration (EIA) said it expects total gas consumption for the 2002-2003 heating season to rise 12% from a year ago to average 73 Bcf/d. This will prop up spot gas prices during the fourth quarter of the year and into the early part of 2003, but “severe price spikes are not likely” due to the gas cushion in storage, the agency reported.

“We expect this winter’s natural gas wellhead prices to average around $3.34/Mcf, or about $0.90/Mcf above last winter’s price,” the EIA said in its Short-Term Energy Outlook for October, which was released last Monday. The agency projects, however, that gas prices for the entire year will average only $2.83/Mcf, down considerably from $4/Mcf for 2001. It sees spot gas prices finishing out 2003 only slight ahead (40 cents/Mcf) of 2002 prices.

The recent strength in spot prices is largely owed to hurricanes Isidore and Lili. Prices climbed to $4/Mcf at the Henry Hub on Sept. 24 as Gulf Coast producers shut in production in the face of Isidore. “Since production facilities suffered no major damage [from Isidore], spot prices eased.” But Lili then bore down on the Gulf Coast and “pushed spot prices back up” to well above $3/Mcf, the EIA noted.

The Department of Energy (DOE), however, does not see sustained price strength in the market. “The overall fundamentals in the market…do not yet point toward consistently high gas prices over the course of the heating season, simply because stored natural gas appears to be in ample supply.” At the end of September, the EIA estimated 3.06 Tcf of gas was in storage, which was 5% above the year-ago level and 12% above the previous five-year average for that month.

By Nov. 1, the start of the heating season, the EIA estimates gas stocks will be at a 10-year high level of 3.221 Tcf, according to its “Winter Fuels Outlook: 2002-2003,” which also was released last Monday. “On a regional basis, stock levels in the Producing and Consuming West regions are particularly strong, as inventories in these regions are over 19% higher than their respective five-year averages.” Despite high withdrawals, it sees end-of-winter stocks at 1,364 Bcf, more than 200 Bcf above average for the end of season.

The anticipated 12% hike in gas demand in the upcoming heating season will likely push residential prices up an average of 40 cents (6%) to about $7.75/Mcf from year-ago levels, and household gas expenditures up 19% this winter under normal weather conditions, according to both EIA reports. “Although higher than last winter, residential prices will be considerably below those of two years ago when U.S. average prices were about $9.50/Mcf,” the agency said.

For the entire year, the EIA anticipates gas demand will increase by 3.6% over 2001 levels. “Higher estimated demand in the industrial and power sectors more than offsets the declines in space heating-related demand in the first quarter. Also, increased heating-related demand in the fourth quarter, compared to the same period in 2001, is expected.”

In 2003, the EIA said it expects overall gas demand to grow by a slightly lower 3.5%, as the economy continues to recover. It believes the consumption increase will come from all sectors next year.

Mostly due to lower gas prices, the agency sees domestic gas production this winter dipping slightly by 1% to average 53 Bcf/d, while production for the entire year is likely to fall by about 1.2% this year, compared to a growth rate of 2.4% in 2001. “Still, current supplies, including natural gas in storage, appear to be at very comfortable levels. In 2003, production is expected to rebound by 2.8% as demand rises and inventories fall back closer to normal,” it said in its short-term outlook.

Gas drilling activity “has fallen significantly from its recent (and quite extraordinary) peak of July 2001, which was spurred by extremely high prices for natural gas. Baker Hughes reported average active rigs drillings for natural gas in September at 736, 32% below the year-ago level. This rate of activity, however, is 20% above the recent low point seen in April.”

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