Spot gas prices forecast to average $4/Mcf next year

Spot gas prices at the wellhead have never been this high for such a sustained period of time, the government says in its December short-term energy forecast, and the outlook for next year is much the same. In 2001, the US Energy Information Administration (EIA) is forecasting prices will average $4/Mcf, compared to $3.60/Mcf in 2000, a 73% increase from 1999.


Spot gas prices at the wellhead have never been this high for such a sustained period of time, the government says in its December short-term energy forecast, and the outlook for next year is much the same.

In 2001, the US Energy Information Administration (EIA) is forecasting prices will average $4/Mcf, compared to $3.60/Mcf in 2000, a 73% increase from 1999. The agency is projecting gas demand will be up 3.8% in 2001, spurred by weather-related demand in the first quarter and continued growth by the power generating sector as new gas-fired plants come on line.

Since June 2000 spot wellhead prices have averaged well over $4/Mcf. For most of September through November, prices have floated above $5/Mcf, more than double the price of 1 year ago, and recently have averaging more than $6/Mcf. Wellhead prices topped $8/Mcf Dec. 6.

The EIA says it now expects winter residential gas prices to average $9.21/Mcf, compared to $6.56/Mcf last winter.

Cold weather for prolonged periods this winter would strain supplies and could result in even higher spot prices, the EIA said. Nationwide, underground working gas storage levels are currently about 8-9% below year ago levels and about 13% below the previous 5-year average The low gas inventory situation, combined with fickle weather, has put the market in a very jittery position.

"We expect that high and volatile gas prices will prevail until solid evidence that the gas supply situation is easing," the agency says.

Power plants propel prices
In addition to relatively low stocks and expected high heating demand this winter, significant increases in gas demand by new electric generating plants will probably prolong the much-above-normal price environment through 2001, even if a decent turnaround in US and Canadian production materializes for 2001, forecasters said.

The EIA is projecting prices will decline by about $1/Mcf in spring 2001 as the weather-related demand recedes and forecasters expect prices to continue falling through the summer.

However, for the year 2001, assuming normal weather and higher world oil prices, the EIA says it does not expect wellhead prices to drop below $4/Mcf. The agency blamed rising prices, in part, on higher production costs and capacity constraints on pipelines.

This winter�October-March 2000�gas demand is expected surge 5.9% over last winter's demand, assuming normal weather for the rest of the season, EIA says. This implies an 11% rise in gas-weighted heating degree-days compared with last winter, which was much warmer than normal.

EIA is forecasting overall gas demand will rise 3.7% this year over 1999, up somewhat from what it projected in November. In 2000, natural gas demand in the industrial sector is expected to increase by 7.4%, while demand by gas-fired merchant electric plants and cogenerators is predicted to rise 18.6%.

Electric utility gas demand is expected to be flat compared to 1999, the result, in part, to sales of electric generating plants by electric utilities to unregulated generating companies. Fuel consumption by these plants is currently recorded by EIA in the industrial sector.

In 2001, utility gas-fired electricity demand is expected to remain flat, while industrial gas-fired electricity generation growth is projected to slow to 11%. The agency attributed the slowdown next year to the net effect of increased growth in gas-fired capacity being offset by the reversal in prices of natural gas relative to oil and a slowing in the growth rate of electricity demand.

The rapid rise in gas prices last summer and fall has pulled delivered gas prices above heavy fuel oil prices, on a cost per btu basis. As this situation is likely to persist, EIA said it expects some recovery in the amount of oil used for power generation over the very low levels seen since late 1999.

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