With heating oil prices reaching a record high on Nymex Wednesday, crude oil staying above $52/bbl and gas futures above $7/MMBtu, energy consumers could be in for a whopper winter heating season. Two forecasts released Wednesday by the Energy Information Administration (EIA) predict that higher prices will remain the norm over the short term.

“Consumers will…be feeling the pinch” this winter, said Guy Caruso, adminstrator of the EIA, during a hearing by a subcommittee of the Senate Commerce Committee on Wednesday following the release of EIA’s “Winter Fuels Outlook: 2004-2005.”

In the Winter Fuels Outlook, EIA projects winter season gas demand will be up 1.5% compared to last winter to 70.45 Bcf/d because of greater heating degree days expected in key regions and continued demand increases in the commercial and power generation sectors. Residential gas consumption in the Midwest is expected to be up 3.7% this winter and residential gas prices are forecast to be 11.2% higher than last winter. Wellhead gas prices are expected to be up 23%.

Meanwhile, domestic dry gas production is expected to be up only 0.6% to 52.28 Bcf/d. “This increase is somewhat less than would have been expected had Hurricane Ivan not disrupted Gulf of Mexico production,” the agency said in its report. Caruso noted that Ivan had a “considerable impact” on both supply and prices.

Shut-ins currently stand at 1.8 Bcf/d of gas and 478,126 bbl/d of oil, according to the latest report from the Minerals Management Service (MMS). On Wednesday MMS reported that nine platforms and two rigs remained evacuated. Cumulative production deferrals since Sept. 11 total 70.504 Bcf of gas and 16.1 million bbl of oil.

That lost production has forced forecasters to scale back their optimistic projections on season-ending gas storage levels. Nevertheless, gas inventories already are above the high end of the normal range and are expected to remain above normal. “Given continued net injections during October, working gas inventories by Oct. 31 are expected to be at their highest since 1990,” EIA said.

The agency also raised its gas price forecasts for 2004 and 2005 in its latest “Short Term Energy Outlook” (STEO) mainly in response to the lingering impact on Gulf of Mexico gas production from Ivan and the effect on storage and the market.

Despite high storage levels, EIA still expects spot prices to “rise significantly once the heating season gets under way.” EIA noted that spot and futures prices increased sharply in the latter half of September in response to gas production losses caused by Ivan. The average spot price for natural gas at the Henry Hub for the month of September was $5.15/Mcf, EIA said.

The agency now expects Henry Hub spot prices to average $6.10/Mcf in 2004 and $6.18/Mcf in 2005. That compares with projections of $5.96/Mcf and $6.14/Mcf in last months STEO.

EIA lowered its forecast for domestic dry gas production for the entire year to 18.87 Tcf from 18.99 Tcf in last month’s STEO. It said dry gas production last year was 19.07 Tcf.

“With continuing high rates of drilling for natural gas in North America, 2005 domestic production is projected to grow by 1.5%,” EIA said. “Steady, if modest, increases in liquefied natural gas (LNG) imports, restrained export growth, and carryover from the robust storage levels noted above are expected to contribute to moderate improvement in the supply picture through 2005.”

EIA expects 840 Bcf of LNG to be imported next year, 25% more than what is projected for 2004, while domestic dry gas production is expected to grow slightly to 19.15 Tcf in 2005. Pipeline imports, mostly Canadian gas, are expected to fall this year to 3.46 Tcf and again next year to 3.34 Tcf from 3.49 Tcf in 2003.

Meanwhile, gas consumption is expected to be flat this year at 21.93 Tcf and grow next year to 22.50 Tcf mainly because of growth in demand from the power generation and industrial sectors.

While EIA projects that prices will rise even higher once winter weather kicks in, not everyone agrees. Ron Denhardt, a consultant with Strategic Energy & Economic Research Inc., said he expects gas storage levels to end the injection season near record highs and that should put downward pressure on prices.

“For the week ending Oct. 4, projected working gas storage injections range from 60 to 90 Bcf,” Denhardt said in a notice to clients Wednesday. “Our forecast is 73 Bcf of injections. Working gas storage is on target to easily exceed 3,200 Bcf. With normal weather and production close to normal by the middle of October, working gas storage should end October close to the all-time record of 3,254 Bcf set on Nov. 30, 2001.

“As storage approaches the 3,200 Bcf level, downward pressure on natural gas prices should increase. A great deal will depend on how fast production returns to normal and weather.”

Denhardt noted that pressure from the crude oil market, which he believes is currently “overpriced,” could provide additional gas price support. “Despite the concern about unrest in Nigeria, there are no supply disruptions,” he noted. “Some oil is being released from the [Strategic Petroleum Reserve] and U.S. inventories increased last week.” However, if oil remains near $50/bbl during the heating season, gas could end up remaining just under $7.

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