U.S. natural gas prices are expected to hover near record highs this year, and not drop as originally forecast, as sagging domestic production and a recovering economy keep supplies tight.
Analysts, who last year predicted prices in 2004 would slip 50 to 75 cents from 2003's record high average of $5.43 per mmBtu as producers stepped up drilling, have been forced to raise their estimates.
Most now expect this year's price average to come close to matching last year's record heights, primarily due to tight supplies.
"My bet is we're not going to see prices erode much this year. There's no doubt that supply has declined, and a 10 percent hotter-than-normal summer could add another dollar to prices," said Stephen Smith of Stephen Smith Energy Associates, an energy consulting firm in Mississippi.
He pointed out that some forecasters were calling for a warm summer across the South, a big user of natgas.
Strained supplies
Analysts called strained supplies in the United States and Canada the main culprit in the case for near-record high prices this year.
They said output from U.S. gas fields is still struggling and not likely to improve much this year.
While the U.S. Energy Information Administration (EIA), the statistics arm of the U.S. Department of Energy, estimates that domestic gas production was up slightly last year and could rise 1 percent in 2004, many experts disagree.
Instead, they're projecting overall output will decline slightly this year after a flat or down year in 2003.
In addition, Canada is wrestling with dwindling output from mature fields, offering little hope that exports to the U.S., which fell 5 to 7 percent last year, will improve in 2004.
The United States relies on Canadian supplies to meet about 15 percent of its total domestic gas demand.
"The market is very concerned about supply. We've had a declining production scenario over the last couple of years, and we're not seeing a lot of investment in new production," said George Ellis, a vice president at Bank of Montreal.
Some bright spots
Inventories, however, are in good shape at the start of the stock building season, standing near 1.1 trillion cubic feet (tcf), or more than 50 percent above last year's level, according to the EIA.
But while utilities should be able to rebuild stocks to 3 tcf by next heating season, many analysts, citing a huge number of gas-fired power generators built in recent years, think 3.2 tcf is needed to meet winter demand, a much more difficult goal.
Utilities typically build up inventories from April through October to help meet peak heating demand from November to March.
Another bright spot is that liquefied natural gas (LNG) imports are expected to rise this year and partly close the supply gap. But analysts said that LNG is still just a small part of the overall supply mix, meeting perhaps 2.5 to 3 percent of the total.
"Declining supply in North America will not be offset by imports of LNG this year. The result is support for higher prices," said Jim Osten, chief energy economist at Global Insight, an economic forecasting firm in Massachusetts.
Rising demand but weather the key
Last year, record high prices pushed demand down to a nine-year low, as price-sensitive consumers like chemical and fertilizer plants were forced to alow their operations or shut down altogether.
A mild U.S. summer contributed to the drop of 5 to 6 percent in consumption, but EIA and others expect gas usage this year to rise by about 2 percent and keep the overall balance tight.
Analysts said a recovering economy could translate into rising demand this year from industrial and commercial companies as business picks up. These sectors typically account for more than 40 percent of total domestic consumption.
And most expect even a normal summer would whittle away at the year-on-year storage surplus.
But of course, summertime weather holds the key for both sides of the supply/demand equation.
On the demand side, if forecasts for a warm summer prove correct, there could be a surge in utility usage and a sharp spike in prices as gas-fired generators power up to cool down temperatures in office buildings, factories, houses and apartment buildings.
On the supply side, the hurricane season that typically stretches from June through November could disrupt the operations of major natgas producers in the Gulf of Mexico, making it difficult to meet pre-winter storage targets and further crimping already tight supplies.
