Citing a host of poor fundamentals for the natural gas market, the Energy Information Administration (EIA) last week projected that spot gas prices will drop 62% to an average of $2.21/Mcf this winter from $5.78/Mcf a year ago. It said it doesn’t see spot prices rising above the $2.50/Mcf level anytime during the fourth quarter and 2002. The EIA now estimates the average spot price for 2001 will be about $4/Mcf.

For 2002, “we expect inventories to remain at relatively high levels and, therefore, we expect further diminishing in the average annual wellhead price to about $2.10/Mcf. Prices could disintegrate even more if we experience mild weather this fall and winter,” the EIA said in its short-term forecast for October, which was issued last Thursday along with the agency’s “Winter Fuels Outlook: 2001-2002.”

The reasons for the low price forecast, it said, are manifold: normal weather for this winter; bulging natural gas storage inventories, increased production levels, weakened economic conditions, and stunted growth in overall gas demand growth fueled by shrinking industrial gas consumption.

Owing to a slowdown in industrial activity, the EIA said that a decline of 2% in total natural gas demand growth for 2001 is likely. “We currently estimate that total gas use (excluding consumption by nonutility power generators for electricity production) fell by about 600 Bcf (18%) during the first half of 2001 compared to the first half of 2000, due to a combination of very high gas prices and falling industrial production in gas-intensive industries,” it noted. “Since we currently see the likelihood of a mild recession occurring during the second half of 2001, swift recovery in industrial gas use seems unlikely.”

In light of predictions of a less severe winter this year, the DOE agency said it sees winter gas demand falling by 1.3% (0.96 Bcf/d) to an average of 71.9 Bcf/d from the level recorded last winter. Demand in the residential and commercial markets is forecasted to average 21.1 Bcf/d and 12.1 Bcf/d, respectively, or 6% and 5.2% below last winter’s consumption levels. The combination of lower demand and prices is expected to reduce a typical household’s winter gas bill by as much as 34% this winter. The EIA predicts prices paid by residential consumers will drop to an average of $6.69/Mcf this winter from $9.49/Mcf a year ago.

The one bright spot on the demand horizon was the gas use of independent power producers as well as industrial and commercial cogenerators, which rose by 23% in the first quarter and is estimated to have grown by a similar amount in the second quarter compared to 2000 levels, according to the EIA. “Gains here are not the result of output strength but rather the reversal of significant fuel substitution away from gas that occurred amidst the gas market squeeze that developed last winter.”

The EIA anticipates, however, that overall gas demand will rise by 3.9% in 2002 as the economy picks up somewhat from its “virtual stall” this year and as depressed prices result in gas displacing oil and other fuels.

The agency sees gas storage stocks, which are serving to depress spot prices, staying on the high side for months to come. The working gas stock level is expected to be well over 3,100 Bcf on Nov. 1 — at the start of the winter heating season — and close out at 1,295 Bcf in late March, compared to 742 Bcf last winter. “This would be the highest level since the 1,406 Bcf level reached in March 1999.”

Adding to already-abundant supplies, the EIA predicts that domestic gas production will rise 1.8% to average 53.6 Bcf/d this winter. However, it has revised downward its forecast for gas production for the entire year, now expecting it to grow by 1.4% in 2001 and 1.3% next year.

As for imports, mostly from Canada, the agency said it anticipates them to average 10.53 Bcf/d this winter, or about 15% of domestic demand, compared to 10.56 Bcf/d last winter. But it expects about a 2.4% hike in imports for the year, followed by a 4.6% increase in 2002.

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