The Energy Information Administration warned yesterday in itsShort Term Energy Outlook that recent natural gas market activity”reveals the backdrop of vulnerability… potential supplyshortfalls,” particularly in light of increasing demand from thepower sector and the winter heating season approaching.

The agency noted the recent resurgence in spot and futuresprices “illustrates continued volatility amidst uncertaintyregarding North American supply adequacy, demand potential and evenpotential hurricane damage.” Sharply higher gas drilling activityshould improve supply, “but apparent performance so far in 2000curtails optimism about significant improvements before the onsetof the heating season.”

EIA said the storage injection rate continues to be “too gradualto calm the market for next winter’s heating season.” Storagelevels are currently about 18% below year-ago levels, according toEIA. Hot weather, particularly in Texas and California, hascontributed to the low storage injection rate, the agency noted.”Natural gas that would normally be added to storage has, to someextent, been used (indirectly through electric utilities) to runair conditioners. Furthermore, demand for natural gas has beengrowing due to the expanding economy over the last 7-8 years andthe widening role of gas generation at power facilities.”

EIA expects gas storage levels to end the injection season 7%below last year’s level. “It should be noted,” EIA said, “that itis not so much the absolute level of inventories that are ofconcern (we expect gas storage to be within a few percentage pointsof the 1995-1999 average at the beginning of the upcoming heatingseason). Given the strong propensity for incremental power demandto be met by gas-fired units (particularly if hydroelectric powercontinues to decline and nuclear power output does not growsignificantly), and given a strong likelihood that heating demandwill be up sharply this winter, expected demand relative toanticipated storage levels may be the highest it has been in manyyears. The impact of this situation on prices is, we think,strengthened by the lack of significant domestic productionincreases yet this year.”

EIA expects gas demand to grow 4.3% in 2000 and 3.2% in 2001.The industrial sector is leading the charge with an expected gainof 9.9% this year, while electric utility demand is expected todecline by 5.2%. “This dichotomy is due in part to sales ofelectric generating plants by electric utilities to unregulatedgenerating companies, fuel consumption by which is recorded by EIAin the industrial sector.” For the power generation sector as awhole, gas demand is expected to post 4.6% growth in 2000.

Noting recent increases in drilling and E&P spending, EIAsaid it is maintaining a “conservative view of possible increasesin domestic gas production for 2000 and 2001, with assumedincreases of 0.5% and 1.0%, respectively, for this year and next.”The U.S. gas rig count on Aug. 4 was at a recent high of 772 rigs.”Still, given that gas-directed drilling in the United States hasexceeded 600 rigs since late last October (compared to the lowpoint of 362 reached in late April 1999) and has exhibited 20% to70% year-over-year increases since that time with little evidenceof rapidly improving production performance through the first halfof 2000, expectations of strong increases in U.S. production beforethe end of this year are probably optimistic if not entirelyunwarranted.”

Net imports, however, are projected to rise by 12% in 2001, EIAnoted. Alliance pipeline will add 1.35 Bcf/d of new importcapacity, which is expected to be expanded to 1.83 Bcf/d.

EIA is projecting that gas prices at the wellhead will increaseby about 55% this winter compared to last winter, and it forecastswellhead prices will average $3.09/Mcf this year, which would bethe highest annual wellhead price (nominal) since 1985.

Total annual electricity demand for 2000 and 2001 has beenrevised somewhat compared with EIA’s July Outlook. Totalelectricity demand in 1999 has been revised upward slightly, while2000 demand expectations have been revised downward slightly due tothe generally cooler than normal summer temperatures overall,despite periods of high temperatures in the south and west. Annualelectricity demand growth is now projected to be 2.1% in 2000 and2.45% in 2001.

This summer’s cooling degree-days are expected to be 4.6% belowlast summer’s. In July, overall CDD were 10% below normal and 22%below July 1999. “Still, underlying demand remains strong andshortages cannot be ruled out in some areas, particularly if Augustturns out to be a hot month. Major concerns for utilities are thepossibility of severely spiking power prices and transmissionequipment failure during hot spells.”

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