Stage set for strong U.S. gas prices in 2001

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Stage set for strong U.S. gas prices in 2001 New York | Reuters | 23/12/00

It's bad news for the nearly 60 million U.S. homes that use gas to fire their furnaces, as the record rally in natural gas prices to nearly double year-ago levels, is likely to continue into next year, fueled by continued tight supplies and rising demand.

Analysts, citing sagging production and a chilly autumn that pared inventories to near record lows, said even normal or slightly above normal temperatures this winter will draw down natural gas stocks to historical lows by the end of winter, setting the stage for firm prices for the rest of 2001.

"Storage is likely to be very low on April 1, probably down to the 400 (billion cubic feet) area, so injection demand is going to be high next year and should help support prices," said Greg McMichael, energy analyst at A.G. Edwards in Denver.

McMichael said he expects wholesale prices at Henry Hub next year to average $4.00 per million British thermal units (mmBtu), up from a record high $3.95 in 2000 and nearly double 1999's $2.30 average.

But he said, "It all depends on the first quarter. If we see prices averaging $6.00-8.00, then the yearly average could be higher, perhaps as high as $5.00." Henry Hub in Louisiana is the benchmark delivery point for pricing most wholesale U.S. natural gas. Hub prices this week rallied to an all-time high of $9.90 as arctic temperatures continued to dominate the Midwest and Northeast.

For U.S. consumers, this translates to a hike in winter heating bills of more than 60 per cent this year to a record $834 to warm their homes with gas, up from last year's average of $540, according to a recent report from the U.S. Energy Information Administration (EIA).

EIA also said residential gas prices from October to March are expected to average a record $9.20 per thousand cubic feet, up almost 40 percent from last year's $6.61 average. Near record inventory declines in November and December have reduced U.S. gas stocks to about 2.1 trillion cubic feet, 23 per cent below last year and 18 per cent below the five-year average, according to recent data from the American Gas Association, an industry trade group.

And even if winter withdrawals this year only match last year's pace during a record mild heating season, end-March stocks will sink to about 390 billion cubic feet, a record low level that should support prices through next year.

"A low inventory level in March is already predetermined, and that means tremendous pressure to inject (build stocks) during summer and fall," said Tom Robinson, managing director at Massachusetts-based consultants Cambridge Energy Research Associates (CERA).

Robinson said he expects Henry Hub prices next year to average in the $5.50-$6.50 range. With demand next year expected to tack on another 1-4 percent to 22.5-23.0 trillion cubic feet and production only forecast to grow by 1-2 per cent following a slight decline this year, analysts agreed there would be no quick fix to the tight supply-demand scenario.

"Everything has lined up this year, and it's not going to change overnight. We have low inventories, demand will continue to grow and production is not really increasing," said Fadel Gheit, a senior energy analyst at Fahnestock & Co. in New York, who forecast Henry Hub prices next year will average $5.00.

Analysts said low oil and gas prices in the late-1990s crippled drilling activity and laid the foundation for the current tight balance, particularly with demand nationwide growing annually by 2-3 per cent, primarily from new gas-fired power generators.

And despite expectations for rising Canadian imports and signs increased exploration was starting to pay off, analysts said the bulk of any supply gains will come too late to tilt the scales this winter.

"I think we'll see significant growth in productive capacity over the next year and a half, but it's going to take some time for supply and demand to come back into balance," said Kevin Petak, director at Virginia-based consultants energy and Environmental Analysis.

While no one was predicting lower gas prices next year, some analysts said an economic slowdown or a recession could loosen the balance and limit the upside. "Natural gas fundamentals are very strong, but in my opinion, $10 gas is unsustainable. Economic growth obviously has an impact on demand, and if we have a recession, there will be lower demand and it could cool off prices significantly," Fahnestock and Co's Gheit said.

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-- Martin Thompson (mthom1927@aol.com), December 23, 2000


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