While the relatively mild summer weather seen thus far in the United States and the major increases in gas storage injections have combined to help tamp down gas prices somewhat, a FERC staff member last Wednesday said he expects market volatility to remain high.

“They got as low as $5.00, briefly,” noted FERC staff member Steve Harvey, in a presentation on gas prices before FERC Commissioners. “They’re back up into the mid-$5.00 range right now.”

The Energy Information Administration (EIA) last week delivered a much more favorable report on natural gas storage, price and production in its Short-Term Energy Outlook for July, but it stressed the market was not out of the woods yet and had far to go before reaching the traditional 3 Tcf storage level by the start of the next heating season (see related story).

At the Commission’s regular agenda meeting, FERC Commissioner William Massey noted that for 2004, EIA adjusted its projection “to somewhat over $4.00, but I think they reduced it by like 60 cents.” Harvey responded by noting that revision “is very consistent with the futures curves that we presented earlier.”

In its latest Short-Term Energy Outlook, EIA said that an average natural gas wellhead price of about $4.34 is projected for 2004, “partly based on our belief that natural gas production will rise modestly in 2003 and hold at improved levels in 2004.”

Harvey said that the heightened level of volatility seen recently in natural gas prices “is something that we tended to expect, based on the level of storage inventory at this point. That creates greater volatility in the market as there’s uncertainty as to exactly how that will play out.”

Harvey said that with the “relatively cool early summer weather and substantial increases in injection into storage for gas, we think things have calmed down a great deal, but they’ll continue to be relatively volatile and probably jump around a fair amount.”

Staff from FERC’s Office of Market Oversight and Investigations (OMOI) provided FERC Commissioners with an overview of the OMOI’s 2003 summer energy market assessment.

The three primary challenges that OMOI sees facing energy markets this summer are: (i) a tight supply-demand balance in the gas market, with effects on natural gas and electricity prices; (ii) a continued lack of demand response in electricity markets; and (iii) financial conditions that have reduced the number of companies active in energy markets, limiting market liquidity and effectiveness.

“It’s fairly striking that throughout the nation, in most regions, gas prices have nearly doubled since last June,” said OMOI’s Jolanka Fisher. “But when you turn to electricity prices, you see that the effect is somewhat more mixed,” she said.

For example, in PJM West, power prices have actually gone down since last summer, Fisher pointed out. “This is, in part, because of a mild winter, but also because of the…relatively small role of natural gas prices in that region.” In contrast, when looking at the West and, in particular, NP-15 and SP-15, “you see that natural gas prices have a large effect on electricity prices,” Fisher noted.

Fisher said that in order to address high natural gas prices, market participants are taking action. “We’ve seen in the last few months, a significant response in the form of new drilling, which will in the longer term have an effect on gas prices,” she said.

Fisher noted that FERC is not sitting still either. The agency has been speeding up certification of pipeline certificates “and, in particular, has done so in the Rockies to bring more of Rockies gas to the marketplace.”

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