Despite strong demand and soaring crude prices, EIA places mostof the blame for the current high gas price situation on tightsupply. “Although rising crude oil prices have encouraged naturalgas prices to advance, the primary cause of these elevated gasprices has been the delicate supply situation,” EIA said.

However, in a new report released last week, ICF Consulting saidit’s not so sure about that. “Extreme weather, storage levels,short-term deliverability, and crude oil prices also havecontributed significantly, but high oil prices are the big driver,”said ICF Vice President Robert E. Baron.

“Today’s conventional wisdom holds that crude oil prices nolonger have significant influence on natural gas prices. But, this’decoupling’ appears to have been reversed, at least for the timebeing,” said Michael L. Godec, managing director of ICF’s oil andgas practice. “Oil and gas prices decouple when excess gas supplyexists and oil prices are low. In such instances, the gas market isdriven by gas-on-gas competition, and gas prices at the burnertipfall below parity with petroleum prices. But today, the situationis the opposite; oil prices are high and gas supplies are tight. Asa result, oil and gas prices at the burnertip are near parity andhave again become coupled.”

Using proprietary gas resource and market assessment models, ICFsimulated the market over the past two years and evaluated thefactors that could affect prices. The findings are part of thecompany’s North American Gas Market Outlook 2000, an annual reviewof supply and demand and the other events driving the gas market.

“There’s more oil-fired generation capacity out there than mostpeople give the market credit for,” said Godec. “We also haven’thad oil prices this high in a long time. The de-coupling of oil andgas prices occurred because oil prices were maintaining such lowlevels.

“There’s also the concern that we have not seen the increase indeliverability that would be commensurate with higher prices, andthere’s a psychological factor associated with [this].Deliverability is down. I still don’t think we’ve worked ourselvescompletely out of the impact of the low-price world that we livedin a year to a year-and-a-half ago,” he said, echoing EIA’sremarks. “We’re only beginning to see the increase indeliverability that is resulting from the increase in drilling. Ifwe wait another six months I think we’ll see a pick up indeliverability as new production comes on line as people go out anddrill more risky but more productive prospects. Our analysisindicates that the supply is there at certain prices. Beginning inthe fall and certainly by next spring I think we’ll start seeing aturnaround. By next spring, I think will stabilize and prices willbe back down in the $2.50-$3 range.”

For more information on the ICF Outlook contact Godec at703-934-3869 or . The ICF Outlook isdelivered to the client as a 2 hours presentation at the client’soffice. Copies of the presentation itself are left with the clientfor future reference. The charge for the service is US$7,500 plusother direct charges (travel, photocopying, telephone, etc.).

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