Winter Gas Price Projections Too High?

Natural gas price increases this winter may not be as sharp as some forecasters are projecting, a top AGA analyst says.

Chris McGill, director of gas supply and transportation, says, "Increases in natural gas prices seem to have slowed down recently. Also, in assessing price projections, it's important to keep in mind that the commodity portion of a residential gas bill can run from one-third to one-half of the total. The remaining transportation portion of the bill is unlikely to show much change, if any, from last year's rate."

McGill also notes that many gas suppliers purchased gas for this winter when costs were lower than they are now.

Still, consumer gas bills will clearly be higher this year than last. Spot prices reached $4.68 per million Btu in June, compared with $2.25 a year ago, although they later dipped under $4. "Because many gas suppliers are currently purchasing some gas for consumption this winter, it is likely that consumers will pay significantly more for each unit of natural gas this winter than they did last winter," a recent AGA issue analysis reports.

The Department of Energy's Energy Information Administration projected in its July Short-Term Energy Outlook that natural gas prices will increase by 50 percent this summer (April-September) compared with 1999 and by 60 percent this winter (October-March) compared with last winter.

The AGA analysis notes that four key factors influence the price of gas in the marketplace: production, storage levels, imports and natural gas demand.

On production, McGill says low gas prices from mid-1998 to 1999 were "an indication to producers that there was an oversupply of gas; so well completions fell off." Rig counts are now up substantially, he says, but it's unlikely that the new drilling will have a significant effect on consumer bills this winter.

Gas storage levels, the AGA issue analysis says, have been significantly lower this year than at the same time last year, but storage levels are only somewhat lower than the average for the past five years. "All indications are that they will be up to targeted volumes by the onset of the winter," the report says.

Canadian gas imports, which have more than doubled over the past decade and now account for 13 percent of U.S. gas consumption, are expected to grow incrementally with U.S. demand growth, the AGA analysis says.

As for gas demand, AGA says it has increased in all sectors at an average rate of 2.8 percent per year.

Weather is also an important variable affecting gas prices, the AGA analysis says, noting that a return to normal winter temperatures compared with the mild levels of 1999-2000 will increase consumers' bills.

"Consumers should expect significantly higher natural gas bills if the present increase in gas commodity prices combines with higher gas consumption due to colder (but normal) weather," the analysis says.

Higher prices, combined with low inflation and a strong economy, seem to be boosting utility stocks. Wall Street optimism about utility earnings boosted the Standard & Poor's Utility Index to an all-time high of 280.7 on June 22, but nearly all second-quarter earnings reports exceeded expectations, leading to predictions that the index will soon climb even higher.

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