Power Engineering - Energy outlook reports slight recovery in natural gas supplies

July 14, 2003 -- The Energy Information Administration's (EIA's) latest short-term energy outlook reports that natural gas supplies have recovered somewhat from earlier projections. In addition, U.S. electric demand is expected to increase 1.3 percent in 2003.

The natural gas portion of the EIA's July 8 Short-Term Energy Outlook is largely optimistic about supply and prices.

U.S. Natural Gas Markets. Working gas storage injections for June made up considerable ground following a slow start in early spring, posting a record increase of 487 billion cubic feet for the month and reducing the storage-level deficit relative to the 5-year average from 28 percent in May to 16 percent at the end of June.

Spot natural gas prices responded, falling by 15-20 percent ($0.90-$1.25 per million Btu) between the first week of June and the first week of July. A combination of reduced demand and increased new supply accounted for the improvement in the storage situation, although demand reductions probably accounted for the bulk of the surge in storage fill.

Still, prospects for some increased domestic production this year and in 2004 continued to strengthen as drilling activity remained strong, with active rigs drilling for natural gas surpassing 900 in June and likely to exceed 1000 in the next month or two. On the imports side, pipeline gas from Canada is down slightly on a year-over-year basis for the first quarter, but prospects for increased imports of liquefied natural gas (LNG) are good, already posting an increase to about 75 billion cubic feet (bcf) in the first 3 months of 2003 compared with 26 bcf in 2002.

While expanded LNG imports could conservatively add about 140 billion cubic feet of additional natural gas supply in 2003, total LNG volumes this year are still likely to contribute less than 10 percent to total natural gas imports into the United States.

With a few exceptions, the natural gas spot price at the Henry Hub has been above $5 per million btu on a monthly basis since the beginning of the year (see Figure 9, http://www.eia.doe.gov/emeu/steo/pub/gifs/img010.gif). The price topped $6 in late May and early June, as concerns escalated about the ability of the industry to rebuild underground storage supplies.

Natural gas prices are likely to remain high as long as above-normal storage injection demand competes with industrial and power sector demand for gas. However, natural gas storage injections were about 40 percent above normal in June. Displacement of natural gas demand (including fuel switching) due to high natural gas prices since winter set the stage for record storage builds in June and falling spot prices through the month.

Despite the improvement in the storage situation, above-average prices and strong gas-directed drilling efforts this year will still be required to guarantee that natural gas in storage reaches sufficient levels by the beginning of the heating season.

If the summer heats up, particularly in the Western and South Central regions, where natural gas is heavily used for the power generation needed to meet cooling demand, storage builds could become more restrained. In fact, occasional sharp price increases could occur if the difficulty of building adequate storage stocks increases. Assuming normal weather, spot prices in the $4.80-$5.10 per million btu range are expected for the rest of 2003.

At the end of June, working gas in storage was about 26 percent below end-of-June 2002 levels and 16 percent below the previous 5-year average. In 2003, wellhead prices are projected to show an increase of about $2.00 per thousand cubic feet (the largest U.S. annual wellhead price increase on record) over the 2002 annual average, pushing the annual average for the year to about $5.00 per thousand cubic feet. In 2004, prices are projected to drop by about 13 percent, as the overall supply situation improves slightly, assuming normal weather.

Natural Gas Supply and Demand

Natural gas demand is expected to remain flat in 2003 despite the sharply higher weather-related demand during the first quarter of 2003 (see Figure 12 at http://www.eia.doe.gov/emeu/steo/pub/gifs/img013.gif). In 2004, growth of perhaps 1 percent from 2003 levels is projected, mainly because of somewhat weaker prices and higher electric power sector demand.

Demand for natural gas this summer is expected to fall by over 3 percent from last summer's level, due largely to the effect of higher prices on the industrial and electricity-generating sectors. Also, cooling degree-days for the season (Q2 2003 and Q3 2003) under our assumption of normal weather would be about 12 percent below year-ago levels. Summer natural gas wellhead prices are projected to be 65 percent higher than they were last summer.

In the event of a hotter-than-normal summer this year, natural gas prices could go even higher, as expanded natural gas-fired electric generation to meet cooling demand would compete with the need to build storage inventories.

Working natural gas in storage stood at about 1,704 billion cubic feet (bcf) at the end of June, 26 percent below the year-ago level (see Figure 13 at http://www.eia.doe.gov/emeu/steo/pub/gifs/img014.gif). Despite a record build in storage last month, this is still the second lowest aggregate inventory level for the end of June recorded by EIA (the lowest was in 1996 at 1,529 bcf).

The need for relatively large volumes of natural gas to refill working gas storage in 2003 remains high and this means that high price volatility can be expected to continue. However, a definite improvement in the supply situation has occurred and the probability of reaching adequate storage levels by November has risen.

Natural gas production is expected to increase by 3 percent this year. High natural gas prices and sharply higher oil and natural gas field revenues are driving the resurgence in natural gas-directed drilling activity this year following the downturn in 2002 (see Figure 14, http://www.eia.doe.gov/emeu/steo/pub/gifs/img015.gif). Monthly oil and natural gas field revenues are expected to continue to average over $400 million this year (see Figure 15, http://www.eia.doe.gov/emeu/steo/pub/gifs/img016.gif). The prospects for significant reductions in natural gas wellhead prices over the forecast period from the current high levels could hinge on the productivity of the expected upsurge in drilling in terms of expected output. An average natural gas wellhead price of about $4.34 is projected for 2004, partly based on our belief that natural gas production will rise modestly in 2003 and hold at improved levels in 2004.

Electricity Demand and Supply

Electricity demand is expected to increase by 1.3 percent this year (see Figure 16, below). Most of the 2003 increase, as it turns out, stems from high demand in the first quarter, driven largely by weather factors (heating demand) which, with corrections to the degree-day data from the National Oceanographic and Atmospheric Administration (NOAA), were noticeably more important than previously thought. If normal temperatures prevail for the remainder of the year, little or no additional net weather-related demand growth is expected.

This situation contrasts sharply with the hot weather conditions that prevailed in 2002. In 2004, annual electricity demand is projected to continue to grow by about 1.3 percent, a slower rate than might be indicated by economic growth, due to relatively weak heating market increases in the first and second quarters compared with those quarters in 2003.

Natural gas-generated electricity production is expected to decline slightly in 2003. This is in part due to fuel substitution related to high natural gas prices, increasing oil-fired plant utilization (where possible) beyond what otherwise would have prevailed. In 2003, petroleum-generated electricity production is expected to increase by about 43 percent.

In 2004, petroleum-generated electricity production is projected to fall back but still remain above 2002 levels. Hydroelectric generation in 2003, while down in the Pacific Northwest, is up in other parts of the country due to high water levels and is expected to increase by 6 percent overall.

Nuclear generation is expected to be somewhat lower than last year, as first-half statistics from EIA and the Nuclear Regulatory Commission indicate a decline from the first half of 2002 of about 3 percent.
Source: EIA, http://www.eia.doe.gov

Add RSS Feed