An estimated 600 Bcf decline in industrial gas demand (not related to power generation) in the first six months of this year, coupled with soaring gas storage levels and rising production has led to a dramatic turnaround in the gas market and should keep average wellhead gas prices “well below” $3 through 2002, the Energy Information Administration said in its Short Term Energy Outlook.

“The current gas situation is one that few (if any) foresaw when extraordinarily low end-of-season stocks arrived at the end of March,” EIA said. “Spot natural gas prices at the Henry Hub fell below $2.50/MMBtu during the closing days of August, and the normal weather conditions and a modest recovery in industrial output during the forecast period are not expected to generate much in the way of new upward pressure on gas prices through 2002. We believe that production capability is more than sufficient to balance the U.S. natural gas market without any significant price spikes over at least the next 15 months.”

EIA projects working gas in storage to end the injection season about 14% above year-ago levels and 5% above the five-year average, putting continued downward pressure on prices. In addition, demand is expected to drop 1.3% this year compared to 2000, while EIA said its production estimates showing a 1.7% increase for the first six months of the year could be too low. EIA predicts prices this winter will average below $3.

Wellhead prices this year are now projected to average about $4.20/Mcf, according to EIA. Next year, with inventory and production conditions expected to remain “robust,” wellhead prices are expected to fall to about $2.65/Mcf. Prices at the wellhead during the spring and summer months of 2002 are projected to average less than $2.50.

“It is now quite possible that prices may collapse even further if the fall and winter weather patterns turn out to be mild, crude oil prices stay stable, and the economy fails to muster at least a modest resurgence over the next few quarters,” EIA said. “Then, gas prices could easily drop to $2.00/Mcf and remain there for months as underground storage levels bulge. On the other hand, a prolonged cold autumn and a harsh winter would diminish storage, allowing the price to rise, but probably not beyond the $3.00-3.50/Mcf range.”

Based on six months of data, EIA sees a demand decline of 1.3% from the 2000 total level of 22.74 Tcf. Sharp reductions in industrial gas demand, particularly related to processes other than the production of electricity, is the reason for the falloff in overall usage, EIA said, estimating total industrial gas use (including consumption by nonutility power generators) fell by about 280 Bcf (6.5%) during the first half of 2001 compared to the first half of 2000. Natural gas use related to electricity output by independent power producers as well as industrial and commercial cogenerators rose sharply — by 23% in the first quarter and is estimated to grow by a similar amount in the second quarter, compared to 2000 levels. “If one excludes all nonutility generator-related demand from the industrial category, we would estimate at this time that such a subtotal of the industrial category fell by over 600 Bcf during the first half of 2001, a 22.5% decline from the first-half 2000 total,” EIA said.

“A combination of very high gas prices and falling industrial production in gas-intensive industries has shaken a great deal of natural gas demand out of the industrial sector so far this year. While price conditions have now swung back in favor of using natural gas, the depressed output situation is not expected to improve appreciatively until early 2002.”

EIA projects industrial demand will rebound by about 1 Tcf or 11.3% next year, however. Most of that is likely to stem from higher use by nonutility generators, but a “significant portion should come from non power-related uses due to much more competitive natural gas prices and a respectable (2.8%) increase in gas-intensive industrial output.” EIA expects total natural gas demand to grow by 4.6% in 2002 as the economy picks up again and as industrial sector demand for gas recovers. The differential between natural gas and fuel oil prices is expected to turn around in favor of gas in the fourth quarter 2001 and should continue to favor gas through next year, according to the agency.

Domestic gas production is estimated to have risen by 2.4% in 2000. But EIA said its estimate of 1.7% growth for the first six months of 2001 could be on the low side because of “unusually high retention of liquids in the gas stream and because of other short-run behavioral shifts in gas marketing, implemented to take advantage of very high prices but effected in a way that precludes detection by the usual estimating techniques.” Nevertheless, EIA is lowering its production estimates for the rest of this year and for 2002 in light of the growing supply situation and the drastic reductions in gas prices. Year 2002 production growth is currently pegged at 2.1%.

Net imports of natural gas are projected to rise by about 4.5% in 2001 and by 9.1% in 2002. Strong increases in gross imports have been partially offset this year by increased exports of gas to Mexico, EIA added. Total gross exports were up by an average of 54% for the first 5 months of 2001. “We assume that export requirements will not expand comparably in 2002. Average import capacity is expected to post gains of 6% and 7% in 2001 and 2002, respectively.”

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