Near-record natural gas storage levels and the absence of any major hurricanes so far this year have set the stage for lower prices as consumers head into the winter heating season, the Energy Information Administration (EIA) said in its Winter Fuels Outlook last Tuesday. As a result, consumers are expected to see lower gas bills for the first time in five winter heating seasons.
“Working gas in storage at the start of the winter heating season (Nov. 1) is expected to be about 3,540 Bcf, still about 360 Bcf above the five-year average. This is close to EIA’s estimated maximum working gas storage capacity of about 3,600 Bcf, which should put downward pressure on natural gas prices, at least until cold weather sets in and inventories begin to drop,” the EIA said. The agency reported last week that working gas storage for the week ended Oct. 6 stood at 3,327 Bcf.
It projects working gas inventories will end the winter season (March 31, 2007) at about 1,380 Bcf, 310 Bcf below the level that existed at the end of the 2005-2006 winter heating season, but still about 320 Bcf above the average of the last five years.
On average, the EIA said it expects U.S. households heating primarily with natural gas to spend about $119, or 13%, less this winter in fuel expenditures compared to last winter. This contrasts with an anticipated $91 increase this winter for households heated with heating oil, a $58 hike for households heated with electricity, and a $15 drop for propane-heated households. The EIA noted that residential gas prices, which were hardest hit by last year’s twin hurricanes, are expected to average $12.23/Mcf this winter, down 16.4% from $14.64/Mcf a year ago.
The National Oceanic Atmospheric Administration predicts that the upcoming winter will be cooler than last year, but still warmer than normal. As a result, the EIA projects that the average household consumption of natural gas this winter will rise 4.7% to 67.6 Mcf from 64.5 Mcf last year. It estimates that the typical gas-heated household will spend an average of $826 this winter, down from $945 last winter. Compared to the average winter bills that are expected for the other major heating fuels — heating oil ($1,522), propane ($1,265) and electricity ($839), natural gas is seen as the most economical this winter.
Gas-heated households in the Northeast will see the highest winter bills ($1,117), while households in the South not surprisingly will experience the lowest winter gas bills ($543), according to the EIA. But the projected household heating bills in both regions still will be lower than what they were in the 2005-2006 heating season, the agency said.
The American Chemistry Council (ACC) said the EIA’s projection of lower natural gas bills this winter heating season is “cold comfort” because gas costs have nearly doubled over the past five years. It noted that the gas consumers spent on average $465 to heat their homes during the winter of 2001-2002, which is close to half of what households are expected to pay this upcoming winter. The group also cautioned Congress against using the expected lower winter gas costs as an excuse to delay action on legislation to open more of the federal offshore to drilling.
“We and the millions of Americans who rely on affordable and reliable American energy are counting on Congress to keep its word, finish the job and enable OCS [Outer Continental Shelf] legislation to become law this year. When Congress returns following the mid-term elections, energy legislation belongs at the top of the priority list,” said ACC President Jack N. Gerard (see related story).
David Parker, president of the American Gas Association (AGA), said last week he believes the odds are better for lawmakers to act during the lame-duck session to open up more of the OCS to oil and gas drilling if the Democrats capture control of the House of Representatives in the November elections. If that should happen, “Republicans, I think, would say to themselves ‘OK, we would really like to have at least in our legacy an energy bill that would open up the OCS'” before the Democrats take over the House, he noted.
Under this scenario, “the House members who now would be losing leadership opportunities in the next Congress would basically concede to the Senate [offshore leasing] bill that has been passed in a bipartisan way,” Parker said. “But if the Republicans retain control, they may be emboldened [not to compromise] because the House Republicans do not feel the Senate bill does very much outside of expediting a 181 lease sale” in the eastern Gulf of Mexico.
The favorable winter price outlook for residential customers mirrors to some degree the falling Henry Hub natural gas spot prices, the EIA said. The agency again revised downward its projections for spot gas prices in 2006 and 2007. It now estimates that the average spot price this year will be $6.90/Mcf, compared to its previous estimate of $7.51/Mcf for the year, and it sees the 2007 spot price averaging $7.53/Mcf, down from its prior estimate of $8.30/Mcf. Spot gas prices averaged $8.86/Mcf in 2005.
The EIA forecasts that the average spot price this month will be $5.40/Mcf, compared to the post-hurricane price of $14 last October.
Paul Wilkinson, AGA’s vice president for policy analysis, cautioned consumers that while their winter heating bills will be lower this year, they will not necessarily reflect the steep drop in spot gas prices that has been seen over the past couple of weeks. This, he explained, is due to the fact that utilities purchased gas for this winter throughout the entire year — when prices were either higher or equal to last year.
This month, prices are “about one-third of what they were last year… But this does not mean that the cost of gas to [the] consumer, or the consumer bill, will be one-third of what it was last year,” Wilkinson noted. “We think it’s going to be lower, but not that much lower. It depends on when you’re buying gas throughout the year and how you bought that gas throughout the year,” he noted.
Utilities hedged their gas purchases. Some locked in prices on as much as 50% of their supply to protect customers from high gas prices in the winter months, said Roger Cooper, AGA’s executive vice president for policy and planning. While hedging is good news in a rising price market, “the bad news in a falling market, as we see here, is you’re probably going to have some of that more expensive gas in your portfolio going into this winter,” he noted.
Gas consumption for the year is expected to drop by 1.1% to 21.68 Tcf from 21.93 Tcf in 2005 primarily due to the warmer than average weather in January of this year, the EIA said. It sees consumption rebounding in 2007 to 22.32 Tcf. “Relatively weak heating-related demand during the first quarter of 2006 is the primary cause of the 7.5% decline in average annual residential consumption from 2005. Consumption in the industrial sector in 2006, on the other hand, is expected to be comparable to the 2005 level because a year-over-year decrease in the first half of the year, due largely to hurricane damage, is offset by a year-over-year increase during the second half of the year.”
The EIA anticipates dry natural gas production will rise this year by 0.8% to 18.39 Tcf and increase again next year to 18.54 Tcf due in large part to the restored production capacity in the Gulf of Mexico following last year’s hurricanes. Meanwhile, total net imports of natural gas, including both pipeline and LNG, are slated to drop 4-5% to 3.44 Tcf this year from 3.60 Tcf a year ago, the agency said.
“The drop in net imports is the result of a decrease in the amount of Canadian production available for export to the United States. Currently, total LNG imports for 2006 are expected to be 650 Bcf compared to 630 Bcf in 2005. LNG imports are projected to total 920 Bcf in 2007. Robust expectations of LNG import growth of 41% in 2007 are largely due to rising incremental supplies from Africa — Algeria, Nigeria, Libya and Egypt in particular,” the EIA noted.
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