US natural gas prices continue to hover near a jaw-dropping level of $10/Mcf in light of a surge in demand-amid low inventories-that was spawned by frigid weather in December.
The January contract for natural gas handily topped $9.80/Mcf on the New York Mercantile Exchange for much of last week. And expectations are that natural gas prices are far from having found their ceiling yet.
The price spike comes in the face of an unusually cold winter that has drained gas storage 23% below the mid-December average level for the last 5 years.
With cold weather continuing throughout key market areas in the US Midwest and East, some analysts now speculate that the US may exhaust its total gas storage by the end of winter.
That could produce even greater price spikes. Gas placed in storage through the summer months provides about 20% of total gas supplies that are consumed each winter and as much as half the gas burned on peak heating days in those key markets.
Although gas prices will drop in the spring, some analysts predict they will likely average above $5/Mcf in 2001.
Most new electric power plants are designed to be gas-fired, increasing demand for that fuel year-round. As a result, winter storage supplies cannot be replenished as quickly each summer as in the past.
Storage concerns
Given the rate of storage withdrawal that accompanied the colder-than-normal weather through December, this would leave the year-to-year storage deficit at about 663 bcf, Cambridge Energy Research Associates (CERA), Cambridge, Mass., estimated in mid-December. Continuing this trend would put storage on track to reach a 488 bcf by the end of the heating season in March, CERA said. That's 270 bcf below the previous record low of 1996.
"At a US inventory this low, many storage operators would be dipping into base gas-gas that normally remains in place to support storage reservoir pressure-in order to ensure that service even to firm customers continues," the analyst said.
This sets the stage for a continuing scramble through 2001 and probably into 2002 to replace depleted inventories, keeping upward pressure on prices. High prices have been needed the past two summers to discourage demand and to allow US storage injections to reach a more-acceptable level of 1.6 tcf. This coming year, the need to inject will be even greater.
"If normal weather holds for the remainder of this winter," CERA noted, "2.2 tcf of injections-which would be nearly impossible to achieve-would be required during 2001, if inventories are to recover even to the record low level reached this year, 2.7 tcf at peak."
Just reaching 2.36 tcf, the analyst contends, would be challenging enough. Much will depend on the extent of production growth in the US and Canada in 2001.
"While a boom in drilling activity has reversed the decline in production, at this point, we appear headed for only a 1.2-1.5 bcfd increase in production during 2001," CERA said. "While this will help knock down the price spikes of this winter, all of this would have to be diverted to storage to bridge the inventory gap.
"Yet we know that some will be needed to serve higher space-heating load next year, as well as the growth in power generation demand for gas. As a result, only a portion can be used for storage injections-and a new record low in inventories entering next winter appears highly likely."
