Natural gas demand will rise with growth in electric generation, but gas supply appears to be growing at an even faster pace, according to Energy Security Analysis Inc.(ESAI). The firm said this week it now expects “continued downward pressure” on gas prices through 2002. It estimates that the expansion of supplies from domestic production, Canadian imports and liquefied natural gas (LNG) will equal to an increase of 3.6% in 2001 and 4% in 2002.

In the company’s June North American Natural Gas Stockwatch, ESAI said it believes that increased gas supply leaves a very real possibility that the response to the upstream sector of the gas industry may be overshooting demand given the current price levels. The report focused on an 18-month timeframe.

“When we did our analysis for this last report, we worked independently and said…they [supply and demand] certainly don’t match up,” said Mary Menino, manager of North American natural gas for ESAI. “It looks like supply is going to keep climbing and demand is responding to higher prices and turning down.

“In the electric power sector we still see increases in gas demand, but we see decreases in industrial [demand] as a result of price. The utility and residential/commercial sector is pretty much weather dependent,” she added.

“We are forecasting that there will be some return to industrial demand over the next couple of years, but the net of it is [that] those increases in utilities and some return from industrial, with normal patterns affecting residential/commercial, will not lead to demand growth as rapid as projected supply growth,” she said.

Due to its forecast that supply might well overshoot demand in 2002, ESAI expects to see the “classic free market’s response to such a misalignment,” prices will be forced down. The firm’s price forecast reflects this position with average Henry Hub spot prices hovering around $4.00 for the remainder of the year. ESAI predicts it will average $4.60 in December, with a full year 2001 average of $5.00. For 2002, the firm predicts an average price of $4.50.

ESAI said the largest increase in production is in the Rocky Mountain region. Wyoming, Colorado, Utah and Montana combined to increase marketed gas production by 648 MMcf/d in 2000, which equals a 31% increase in Wyoming and a 21% increase in Montana compared with 1999 levels.

For more information on Energy Security Analysis Inc., or to inquire about the company’s June North American Natural Gas Stockwatch, visit the company’s web site at www.esai.com.

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