Consultants at Global Insight predict that 3 Tcf-plus storage levels at the end of November will result in lower-than-expected prices next year, but a number of factors, including limited LNG import capacity, minimal gains in Gulf of Mexico gas production, further declines in gas imports from Canada and a growing economy, will put a floor under the market.
While mild weather last week reduced storage usage, the Energy Information Administration said Wednesday that there still was a net withdrawal of 1 Bcf, leaving working gas levels at 3,154 Bcf. With much colder weather this week and December approaching, it appears unlikely that storage will rise again this year.
However, working gas levels are sufficiently high to continue putting downward pressure on prices. As of Friday, Nov. 21, working gas levels were about 147 Bcf above the five-year average and 107 Bcf higher than at the same time last year. This season’s peak working gas level of 3,187 Bcf on Nov. 7 fell only 67 Bcf short of the all-time peak of 3,254 Bcf on Nov. 30, 2001 and exceeded peak storage levels in seven out of the last nine years.
While there is a mixed bag currently of various supply and demand factors, according to Global Insight, the supply-demand balance still remains bearish mainly because of the storage situation and the impact high prices have had on reducing gas demand. Global Insight calculates a 4 Bcf/d loosening of the balance this year compared to last year. Also, supply trends have turned more positive for the second half of 2003.
“This year, storage at the end of November is likely to be above 3 Tcf with small net withdrawals for the month thus setting the stage for somewhat lower prices then previously expected,” according to Global Insight’s Jim Osten.
Another factor negatively affecting gas prices is the expectation for weaker crude oil prices next year due to an expected mild winter, over-production and a possible faltering of the world economic recovery. “While the base case has economic recovery and prices of $24 for West Texas Intermediate crude oil in 2003, if downside pressures arose from the economy, weather and over-production, prices could dip below $20 per barrel,” said Osten.
There also is a possibility of a warmer than normal winter. Weather trends to date have been mixed with a cold October and a warm November. “November weather and storage patterns are a leading indicator of prices for next year,” according to Global Insight. “In past winters with price spikes, November usually gave fair warning with cold weather and strong storage withdrawals as in 2002. The one time that storage build continued through November, in 2001, prices fell throughout most of the next year, 2002.”
The National Weather Service currently shows equal chances of above and below normal temperatures over most of the eastern United States for December, January and February. Above normal temperatures are expected for those months over the Pacific Coast, Southwest and Texas, and the Midcontinent and Upper Midwest.
On the other side of the equation are several bullish supply factors, including declining gas imports from Canada, limits on LNG import capacity, and flat domestic gas production.
According to Global Insight the “supply situation for 2004 appears tight. Canadian supply for 2004 is expected to continue to decrease, according to TransCanada Pipelines. TCPL mainline volumes are expected to decrease by 0.3-1 Bcf/d during 2004, which implies that pipeline imports could be pressured down.”
Meanwhile, the U.S. economy is expected to grow more than 4% in 2004. “Recent economic indicators remain bullish,” Osten noted. “The U.S. locomotive shifted into a higher gear this summer, propelled by consumer spending. Moreover, upturns in capital spending and, more recently, employment are tangible signs that business confidence is firming and the expansion is entering a self-sustaining phase.”
So while storage levels and weather could limit price increases, imports, production and the economy will give the market plenty of support.
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