EIA cuts gas spring/summer gas price forecast on lower demand

By the OGJ Online Staff

HOUSTON, June 7, 2001 — Falling demand for natural gas to fuel electric generation in the first 5 months of the year helped send gas prices plunging and led to higher than expected injections into storage, said the Energy Information Administration in its June assessment.

EIA estimated electric utility demand for gas fell 16% between January-May from year ago levels, as electric utilities turned to other fuels because of high prices. Mild weather also held gas and power demand down, the agency said.

Meanwhile, industrial demand, which was generally flat or negative in the first 4 months of this year, began to turn around in May as gas prices fell and the differential between gas and fuel oil prices narrowed, it said.

With demand down and storage up, the EIA cut its average wellhead gas price forecast for the spring and summer to $4.14/Mcf, down 50¢ from its forecast in May. Despite this sizeable downward revision, the EIA’s Dave Costello said the agency continues “to believe that it may be awhile before wellhead prices revisit the level of under $2.50/Mcf exhibited a little over 1 year ago.”

Weather will continue to be a major factor influencing demand for both gas and power. Costello said higher temperatures in regions that use large amounts of gas for power generation could raise the competition for gas supply between cooling and storage sources and lead to the resurgence or at least stabilization of gas prices.

Factors that may keep gas prices from rising this summer are the likelihood that Texas will be cooler this summer than last and the fact that gas-fired generating plants installed since 1999 are more efficient than existing plants.

Hotter than normal
This summer’s overall cooling degree-days (CDD) are projected to be 2.6% above normal based on April and May temperatures, or about 1.5% above last summer’s CDD total, according to the EIA. Summer electricity demand is expected to be 2.2% higher than last summer based on economic factors as well as weather.

The EIA is now projecting the 2001 average wellhead price to average about $4.75/Mcf. For the year 2002, Costello said the storage situation is expected to improve somewhat and with that, the EIA expects a decline in the average annual wellhead price to $4.24/Mcf.

US natural gas demand is projected to grow by 1.8% this year, down from a robust 5% growth in 2000. Growth in 2002 is expected to rise 3.4% as the economy picks up again from its dip in 2001, and as new gas-fired power generation requirements continue to mount, EIA said.

The EIA expects falling utility demand for gas to reverse itself by September due to new gas-fired power generation requirements. Industrial demand began to turn around in May as gas prices fell from more than $5/Mcf to under $4.

Electricity or natural gas intensive industries, such as copper and aluminum smelters, fertilizer producers and chemicals manufacturers, turned away from natural gas due to high prices at the beginning of the year. As the price differential between natural gas and distillate prices narrows, making gas more competitive with fuel oil in the industrial and electricity generating sectors, gas demand will pick up, EIA said.

The EIA said heavy injections into gas storage during recent weeks have eased concerns about storage levels going into the fall. Continued high storage injections are expected for the remainder of the summer and gas storage levels at the beginning of the heating season are expected to be higher than they were at that time last year, it said.