The Energy Information Administration (EIA) sees spot wellhead prices for natural gas, which currently are hovering around $2-$2.20/Mcf, averaging just under $1.90/Mcf for the rest of the year due to a weakened economy, slower industrial demand and bulging inventories. This would be less than half of the spot price that existed during 2001.

In its “Short-Term Energy Outlook” for February, which was released last Wednesday, the Department of Energy (DOE) agency said spot gas prices are likely to finish out the winter at around $2.21/Mcf, about two-thirds lower than the $6.48/Mcf average seen last winter. The “surprise” this winter has been that Henry Hub spot prices remained as high as they have (in the $2.30-$3 range through mid-January), despite the high storage levels and weak demand fundamentals, it noted.

The EIA expects domestic dry gas production to drop by about 3.4% in 2002 over last year. “Without such a reduction, a collapse in natural gas spot prices to very low levels in 2002 would seem quite likely. As it is, we see a strong possibility of spot gas prices approaching the range of $1.60-$1.70/Mcf by mid-summer, barring late winter cold snaps or very hot summer conditions.”

The projected cutback in domestic gas production this year will bring gas inventories, which were 80% above last year’s levels at the end of January, much closer to normal by the middle of next fall and set the stage for a “moderate price recovery” in 2003, the agency said.

Along with the weaker prices, Baker Hughes reported that average active rigs drilling for gas in January fell to 725, 18% below the year-ago level and 32% below the peak seen in the current drilling cycle. While further reductions are anticipated this year, the agency said, this “should bottom out somewhere between 560 and 600 average monthly average rigs over the next 12 months or so.”

The EIA estimates that overall gas demand for 2001 fell 4.8%, mostly due to the downturn in gas-intensive industrial production and partly due to the weak heating-related demand in the residential sector this winter. Because of the unseasonably warm temperatures, overall winter gas demand is projected to be down 8.4%, compared to a 6.4% growth last winter, the agency said. Residential and commercial consumption is likely to finish out the winter down 16.4% and 11.2%, respectively.

As a result, residential gas customers have seen considerably lower heating bills this winter. For example, the EIA estimated that the average bill for a gas-heated household in the Midwest was 42% lower this season.

In addition to the warmer weather, the overflowing gas inventories have been a key factor in depressing gas prices. By the end of the current heating season, working gas stocks, which were pegged at 2.256 Bcf at the end of January, are expected to be double the level seen at the end of last March, the EIA estimated.

“Weak industrial demand and excess underground storage levels should keep a lid on spot prices until next fall,” according to the agency. “For 2003, we project that…natural gas wellhead prices will rise accordingly, gaining about 50 cents per Mcf on average compared to 2002.”

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