Posted on 02/25/2003 1:47:16 PM PST by RCW2001
By Joseph Silha
NEW YORK (Reuters) - U.S. spot natural gas prices spiked to record highs on Tuesday as a bitterly cold winter season in the eastern U.S. has sapped natural gas supplies, setting the stage for higher energy bills this year, analysts said on Tuesday.
A steady flow of arctic air has forced consumers to crank up furnaces this winter as early predictions that a mild, El Nino winter season would slow heating demand have long been forgotten.
"We went into the heating season with unusually high stocks, but winter started early and hasn't stopped," said Don Murry, vice president at Oklahoma-based consultants C.H. Guernsey & Co.
On Tuesday, spot gas prices at Henry Hub, the wholesale benchmark price point in Louisiana, shot up above $18 per million British thermal units this week, an all-time high for spot gas and more than five times the $3.30 average seen in 2002.
Analysts say the price spikes will inevitably mean higher heating and cooling bills for consumers later this year.
The U.S. Energy Information Administration (EIA) estimates that by the time gas makes it to the retail market, homeowners will be paying about 15 percent more this year, a spokesman said.
"We're estimating a 15 percent price increase but there is additional consumption this year because of the weather, so actual (heating) bills will be up more," he said, noting EIA's residential gas outlook would probably be revised higher soon.
Some 60 million U.S. homes -- about half the single-family homes in the country -- use natural gas to fire their furnaces, according to industry figures.
DWINDLING STORAGE, OUTPUT
This winter's unusually brutal weather has drained gas inventories to near historic lows, with the latest EIA data showing supplies have plunged to 43 percent below levels last year and are running at almost 30 percent below the five-year average.
"The bottom line is that frigid weather came out of nowhere which led to historically high (inventory) drawdowns and extremely high cash prices," said Kristin Domanski at Energy Security Analysis, an energy research firm in Boston.
Some analysts said they expect supplies to fall to record lows of about 700 billion cubic feet by the end of March, a hole that may be tough to fill before next winter.
Others are even more dire in their predictions.
"We could easily be under 500 bcf by the end of March, and the market is just starting to recognize that," Murry said.
Utilities typically build up inventories from April through October to meet the peak November-March heating demand.
Compounding the problem is a decline in output from the nation's gas fields, which slipped 5 percent in 2002 and could fall again this year as cash-strapped energy companies focus more on improving balance sheets than finding supplies.
Producers, hit by closer scrutiny from credit ratings agencies after Enron Corp.'s (ENRNQ.PK) demise, have been slow to boost exploration and production (E&P) budgets this year even though gas prices have been on a steady uptrend for months.
The latest data from oil services firm Baker Hughes (BHI.N) showed 767 drilling rigs currently searching for gas, up from a low last April of 591 but well below the 900-950 rigs many analysts believe are needed just to keep production steady.
Analysts, moreover, do not expect much help from Canada in closing the supply gap, which typically exports enough gas to the U.S. to meet about 15 percent of total demand.
Canada is also suffering a downturn in drilling and stocks there are also well below normal levels.
Most analysts expect gas exports from Canada to languish at current levels or even dip slightly this year.
KILLING DEMAND
While fears about a war with Iraq have been wreaking havoc in the oil market, analysts say strong fundamentals are likely to keep gas prices high regardless of whether the conflict is averted.
"A key determinant of futures prices will be what energy intensive users such as petrochemical, fertilizer, power producers, etc. can afford to pay," Thomas Driscoll, managing director at Lehman Brothers, an investment bank in New York, said in a recent report.
While high prices are likely to spur voluntary conservation and force some industrial users to slow output or close altogether, analysts said the supply-demand balance was likely to remain tight at least through this year.
Manufacturing makes up about 40 percent of total gas use, and with little hope of improving the supply picture this year, slowing demand may be the only way to rebalance a tight market.
Some analysts, who just last fall predicted that natural gas usage would rise by 2-3 percent in 2003, now expect overall consumption to fall 1-5 percent this year because of high prices.
How does this relate to Iraq? Did I miss something in the article?
Call me silly, but wouldn't finding gas to sell tend to increase the bottom line? Especially where prices are high?
SD
I see your point.
Personally I blame the environmentalist blocking of domestic oil as much as anything. Even if prices went sky high with domestic oil for some reason, the money would stay here, be spent here, employ people here. We'd have both the oil and the money. As it is now, we have the oil but the money goes elsewhere.
Look at Noble, or Ocean. My personal favorite right now is Williams. Their stock is recovering, but still seems undervalued to me.
We do see LNG as the cornerstone of the natural gas industry
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