Fueled by a weakened appetite for natural gas in the industrial sector, forecasts of normal weather for winter, bulging storage stocks and a grim economic fallout from the Sept. 11 terrorist attacks, the Natural Gas Supply Association projected Tuesday that gas demand will be flat this winter compared to last year.

Based on a combination of these fundamentals, “we estimate that natural gas demand for this winter will range from a decrease of 2.1% (250 Bcf) to an increase of 1.5% (175 Bcf) compared to last year,” forecasted the trade group, which represents major gas producers, in its annual Winter Outlook.

“Our analysis reveals a dramatically different natural gas market than this time last year, when we were expecting and experienced a rough winter heating season. While the fundamentals that drive the natural gas market all pointed toward higher prices last year, this year’s fundamentals reveal a much improved scenario for this winter’s consumers,” said NGSA President Skip Horvath at a press briefing in Washington, DC.

In short, gas consumers can expect much lower utility bills this winter, according to the NGSA. Although certain “wildcards” exist for the short term that could alter some of its forecasts — such as the prospect of war in the Middle East — the producer group said it doesn’t anticipate these will lead to “sustained price volatility” for gas.

The projection for a 1.5% increase in overall gas demand this winter, to 11.87 Tcf from 11.69 Tcf last winter, was made prior to the terror assaults, NGSA said. But it adjusted its demand figures downward in the wake of the attacks to account for the expected negative impact on industrial gas demand. It now predicts that overall winter gas demand will dip this year by 2.1% to 11.44 Tcf.

“The events of Sept. 11 will have the greatest impact on natural gas demand in the industrial sector. Before Sept. 11, we estimated an increase in industrial demand of 5.8% (216 Bcf) as industrial operators fuel-switched back to natural gas and increased their output. But in light of these events, it appears that industrial demand could decrease [by] as much as 4.8% (176 Bcf) from last year due to sluggish economic growth,” the NGSA said. For this winter, it projects industrial gas demand will fall to 3.52 Tcf from 3.7 Tcf last year.

Due to forecasts of normal weather this winter, residential and commercial demand also is expected to drop by 6.6%, according to the NGSA. The group projects that demand for this sector will dip 395 Bcf to 5.59 Tcf during the winter months. It cautions that the demand figures for the residential/commercial sector could fall further — by an additional 150-500 Bcf — if this winter is a mild one. However, “a repeat of last winter could increase demand for these two sectors [by] an additional 400 Bcf,” it said.

The one bright spot, the NGSA believes, will be the gas demand by the electric generation sector. It expects this to rise 338 Bcf to 1.48 Tcf, partially offsetting the losses in gas demand in other areas. “This increase in demand is due in large part to electric generators switching from distillates back to natural gas because of low prices, environmental compliance requirements, and new electric generation plants coming on line.”

While coal is a “strong competitor” of natural gas in the power generation market, Horvath said he didn’t see coal cutting into gas’s share of the market in the short term. “It is not a short-term issue. Coal plants take as long as 16 years to site. Natural gas [plants] take 18 months to two years to site. So natural gas has a strong competitive advantage there…and the price of coal has gone up as well” in relation to gas.

The anticipated flat gas demand this winter, combined with high storage levels (estimated to be 500 Bcf higher than last year at the start of the winter season) and a modest rise in production, are sure to put greater downward pressure on gas prices this winter compared to last year, NGSA said.

Horvath, however, shied away from forecasting gas prices for the winter period. “We’re not going to predict the actual price because nobody knows that.”

But he said he doesn’t believe the current price below $2 will last long. “We do not anticipate that the lower prices indicating oversupply of natural gas [are] sustainable. The economy will come back. The U.S. will get back on its feet, and we will have that fundamental tightness of natural gas supply,” Horvath predicted. The “seeds in a way have been sown” already for tighter gas supply later.

Given the prospect for higher gas prices, he believes that projects to import liquefied natural gas (LNG) and to transport gas from Alaska to the Lower 48 states “will largely go forward.”

Horvath sees two potential trouble spots this winter — California and the Northeast. Although California has promised to have its in-state pipeline capacity expanded by the start of winter, he said he still believes “that’s an area to watch.” The Northeast bears watching as well because of the “colder-than-normal temperatures” anticipated for that region this winter, he noted.

Despite current low prices for gas, he said he’d be “surprised to see many shut-ins” by producers. What the industry will see, however, is producers “not exploring as vigorously [or] pouring a lot of money [into] exploration, because that money just isn’t there,” he told reporters.

The NGSA acknowledged that there are a couple of “wildcards” that have the potential to change its projections. “If military action occurs, it is not clear how it would affect the market. The current [deregulated] natural gas market has only been in place since 1993, after the Persian Gulf War, which provides us with little for comparison,” the group said.

A war in the Middle East would have a significant upward effect on crude oil prices rather than gas prices, the NGSA said, but it noted that “sometimes oil prices can pull natural gas prices up with them.” Should another “traumatic event” occur in the United States, “we do not know how it would affect the market,” the producer group said. Since Sept. 11, natural gas prices have trended downward.

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