EIA forecasts stronger 2002 gas demand, but short term uncertain

By the OGJ Online Staff

HOUSTON, Aug. 8 -- US natural gas demand is expected to rise 4.3% in 2002 on the strength of a rebounding economy and a reduction in fuel switching by industrial consumers, government forecasters said Wednesday.

The Energy Information Administration is projecting gas demand will be flat this year, compared with estimated 5% growth in 2000. It also warned of a possible price "collapse" below $3/Mcf within the next few months because of temperate weather, economic stagnation, and gains in gas production.

In Tuesday trading, the September natural gas contract dropped 5.6¢ to $2.97/Mcf on the New York Mercantile Exchange, and one analyst warned prices could test the $2/Mcf range.

Industrial gas demand for gas was falling or flat during the first 5 months of 2001 from year-ago levels, but began to reverse itself in June due to lower prices and new gas-fired power generation requirements.

In June, gas sold to the industrial sector fell to under $5/Mcf, and in August, the EIA said, the price differential between gas and distillate prices is expected to continue to narrow, making gas more competitive with fuel oil in the industrial and electricity generating sectors.

However, agency forecasters noted the outlook for gas prices is unusually murky. "The emerging balance from the data and estimates we have for the first half of the year suggests that either demand is being overstated to some extent or production is being understated," said Dave Costello.

If production gains prove sluggish, the prospect of significant gains in winter demand bolstered by an improving economy and relatively high oil prices may contribute to price support at or above current levels of about $3.25/Mcf, EIA said in its monthly assessment of energy markets.

Uncertainty over outlook
But, if production capability is growing sharply, Costello said, far more than a seasonal recovery in demand may be needed to maintain prices above $3/Mcf. He said year-to-date data doesn't provide clear indications of which scenario is most likely.

Nonetheless, EIA said relatively stable world oil prices, increased gas use by electric utilities, and the assumption of normal weather are likely to keep wellhead price levels above $3/Mcf on an annual average basis for the near term. The average for all of 2001 is now projected to be about $4.40/Mcf.

Domestic gas production rose an estimated 2.4% in 2000 and is forecast to continue to increase 3.2% in 2001 and 3.3% in 2002. EIA projected the growth in gas supply is expected to exceed demand growth through the remainder of the year. Strong increases in gas imports have been partially offset by a 54% increase in exports to Mexico for the first 5 months of 2001.

The recent reversal in natural gas prices could lead to a competitive price advantage for gas by the middle of next year, EIA said. For the much of this year, coal demand was exceptionally high. Coal stocks at electric utilities fell drastically and are still quite low, the agency said.

Spot coal prices are up sharply. As a result, for the first time since 1990, the annual average cost of coal is projected to rise about 5%, compared to last year. Next year, EIA said coal prices should recede, reflecting the decline in gas prices and replenished stocks.

Electricity demand is expected to growth 2.2% this year and 2% in 2002, compared to an estimated 3.7% growth rate in 2000. EIA is projecting industrial electricity demand, which has slumped for nearly 9 months, will revive next year along with the economy.