Natural Gas Supply
https://www.forbes.com/markets/newswire/2003/02/07/rtr873772.html
Cold cuts deep into U.S. natural gas supply
Reuters, 02.07.03, 1:01 PM ET
By Joseph Silha
NEW YORK (Reuters) - A bitterly cold winter in the eastern U.S., soaring heating demand and a steep drop in available supplies have set the stage for lofty natural gas prices through the rest of the year, industry analysts said.
Natural gas prices have climbed steadily since September as an unexpectedly brutal start to the 2002-2003 heating season devoured a record high surplus built up during last year's unusually mild winter, opening up a gaping deficit.
This spells bad news for consumers, who will have to pay more to heat and cool their homes this year.
"If stocks end (the winter) near 700 billion cubic feet, we're in the hole big time," said Marshall Adkins, managing director of energy research at Raymond James in Houston.
"It's going to be very difficult to fill storage in time for the next heating season," he added.
The latest weekly report from the Energy Information Administration (EIA) showed total U.S. gas inventories of 1.521 trillion cubic feet had slipped to about 35 percent below last year and 16 percent below the five year average.
Utilities and heavy industries typically build inventories from April through October to meet peak winter heating demand.
But persistent cold, peppered with brief bursts of arctic air, has accelerated usage, leaving some analysts expecting stocks to end this winter at a mere 900 billion cubic feet.
Over the past 9 years, the average low point for U.S. gas storage at the end of the heating season was 1.09 tcf, with a record low of only 697 bcf seen in 1996.
SAGGING OUTPUT, IMPORTS
Low storage, by itself, does not necessarily mean high prices, but when coupled with declining production, it means some serious competition for gas this year.
"We had to rely on (pulling gas out of) storage more this year because productive capacity has been declining. Even with these high prices, drilling activity has not come up dramatically," said Kevin Petak, director at consultants Energy and Environmental Analysis in Virginia.
Spot prices at Henry Hub, Louisiana, the wholesale market's benchmark price point, have shot up to above $6 per million British thermal units, nearly twice the $3.30 average in 2002.
Despite these high prices, cash-strapped energy companies have been slow to spend more to drill for gas, focusing instead on propping up their balance sheets to improve credit ratings.
The nation's natural gas production slipped 3-6 percent in 2002, partly because low prices early in the year discouraged drilling. Most analysts see output holding steady at best this year, with some predicting another 1-3 percent decline.
Meanwhile, storage operators will have to struggle to rebuild depleted stocks at the same time power producers will be straining to meet summer air conditioning demand.
In addition, analysts do not expect much help from Canada in closing the supply gap, which typically exports enough gas to the U.S. to meet 15 percent of total demand.
Canada is also suffering a downturn in drilling, and most analysts expect exports to stay flat or slip slightly in 2003.
"This is not a problem that goes away quickly. We could see high prices persist through this year and maybe next year," Petak said, noting he just ratcheted up his 2003 Henry Hub price forecast to $6 from a $5 projection late last year.
STEADY DEMAND
At the same time, gas consumption, which rose some 3 percent last year, should remain flat or inch up only slightly this year because of new gas-fired power plants, though some analysts said high prices could lead to an overall decline.
"Demand could stay relatively flat this year as the pick-up in power-related and space heating demand is offset by deterioration in industrial demand. You have to worry about what $5-plus gas is doing to (industrial) demand," said Shannon Nome, energy analyst at J.P. Morgan in Houston.
Analysts said greater reliance on gas in new homes and for commercial heating has helped to whittle down stocks.
And most agreed the balance between supply and demand is likely to remain tight through this year and possibly longer.
While switching to cheaper fuels like residual oil or importing more LNG (liquefied natural gas) can take some of the pressure off, analysts said there was little hope of reversing the tight scenario near-term, particularly with production not likely to recover much in 2003.
"We're talking about an extremely tight gas market this year, with prices (at Henry Hub) sustained above $5, perhaps for a couple of years," said Raymond James' Adkins, who expects production to slip another 3 percent this year.
In addition, industry, still struggling with a slow-growth economy, will also be hit hard, with some firms likely to slow output or close plants because of high energy costs.
Manufacturing makes up about 40 percent of the gas market.
Analysts, who late last year were still predicting Henry Hub prices would average $3.75 in 2003, have almost all revised their expectations to $4 or higher, with more aggressive forecasters looking for a $5-6 average.
Copyright 2003, Reuters News Service