Borrowing from Mark Twain in summing up the current wholesale natural gas market and where it is headed, DC Public Service Commission’s (PSC) Dr. Jeffrey V. Conopask, quoted, “Predicting is pretty risky business, especially about the future.” He said he believes wholesale prices for the 2003-2004 heating season “continue to suggest that natural gas expenses will be higher for consumers than those of the most recent winter.”

In the Wholesale Natural Gas Market Assessment conducted by the commission’s Office of Technical and Regulatory Analysis and released Monday, OTRA Senior Economist Conopask noted that there still is a chance that gas will be considerably more expensive if winter proves to be colder than normal. However, even if the winter is slightly warmer than normal, “we will still be paying more per therm of commodity (remember the expensive storage this summer) even though we may not be using as many units of commodity to heat with,” he said.

“In our view, OTRA’s forecast for next winter is reasonably safe as long as we do not start injecting even more expensive (by historical standards) natural gas due to a late summer heat spell or endure a very active hurricane season in the Gulf. So far, we are safe on both counts, but the season is only half over.”

The OTRA assessment noted that current wholesale prices for August are in the $4.70/MMBtu area, which is lower than last month, but still more than prices in the relatively softer market of one year ago (about $3.00/MMBtu in that month). Using Washington Gas Light Co. as an example, OTRA found that the utility’s current wholesale prices, when combined with WGL storage and peaking gas charges, result in much higher retail prices than what was experienced last year.

“We expect this price level will continue, at a minimum, throughout the summer, Conopask said. “In fact, the futures price for August 2003 is currently just over $4.80/MMBtu, with the current spot price slightly lower, based upon the expectations of the season, but also a function of still depleted storage inventory levels which are being replenished.”

He noted that while there has been a dip in prices this month, if the summer heats up along with more hurricane activity, “we can expect to see up ticks to the $5.50 level.” Taking the volatility in the wholesale market into account, the economist said “we are actually lower than the $5.50-$6.50/MMBtu trading range forecast earlier this year, which is a consequence of cooler than expected early summer weather that reduced cooling demand.

Despite the strides that have been made on the storage injection front to-date, Conopask said OTRA still expects prices to remain firm around at least the $5.00/MMBtu level on average, which is still a 10% drop from earlier forecasts. Because this summer is still shaping up to be a very expensive storage injection season, Conopask said it “also means prices next winter are also expected to be higher than last winter’s. Although storage injections have not been as pricey as we feared early on, the summer is half over and another 1 Tcf still must get into storage by Nov. 1, 2003, right as we pass through the heart of the hurricane season.”

As for the economy factor, Conopask said “the economic data has taken a decidedly bullish (strong) turn as many indices are indicating that the economy is strengthening,” noting that this is the first month that his assessment is “more positive than tempered.”

“Evidence continues to build that we have turned the corner,” he said in the assessment. “For example, solid evidence is emerging of a major upturn in industrial production. That occurrence also may mean increased natural gas usage, depending on the price. Rising wholesale prices still could be a damper on that upturn, however. This is a double-edged sword, since more demand pressure will push prices up in the short run.”

On the production front, Conopask said the longer-term prices for investment in drilling that the industry looks for above the $3.25/MMBtu level in the 18-month strip “continues to be available,” but not the same as last month. “However, exploration firms continue to have good reason to invest in new drilling prospects to add to our supply.” Despite the ramp-up in drilling activity, OTRA still believes other sources of supply will be needed and are most likely liquid natural gas (LNG) capacity additions given forecasted demand in the longer term.

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