The industrial customer will be the overall loser next year as lagging U.S. and Canadian natural gas production, increased exports to Mexico, increased power generation use and pressure to refill storage is expected to keep the natural gas market tight and prices high, according to a report by Simmons & Co. International.

“We forecast that over the next 12 months, gas storage levels will move from near full (3,200 Bcf) to our estimate of minimum full (2,700 Bcf), such that there is not room in the supply and demand calculus to accommodate industrial demand expansion,” the study said. The company is predicting average gas prices in 2003 will be nearer to $4 than $3.

The Houston-based investment company projects U.S. production will decrease 1.5% in 2003. “Canadian production is at its zenith and imports from Canada could decline next year, while U.S. natural gas exports to Mexico are on an increasing trajectory,” according to the report authored by David Pursell. “The burden to increase U.S. gas supply increasingly rests on the untested shoulders of LNG.”

The industrial, as the marginal user, will suffer from the restricted supply. Simmons is predicting industrial demand will remain flat while residential/commercial demand will increase 0.4 Bcf/d, and power generation demand increases by 1 Bcf/d.

As for storage, the Simmons & Co. report predicts it will end the winter season March 31, 2003 at about 1,200 Bcf, compared to 1,518 at the end of March 2002. “With low levels of storage entering the 2003 refill season, we do not see storage levels exceeding 2,700 Bcf entering the 2003/2004 winter (compared to approximately 3,200 Bcf entering the current winter).”

Simmons said it is increasing its projected average 2003 Henry Hub price from $3.30/Mcf to $3.80/Mcf. This is predicated on a $25/bbl WTI oil price forecast for next year. A significant drop in the oil price could induce fuel switching and moderate gas prices.

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