HOUSTON, Feb. 6 — Government officials Wednesday predicted gas demand will revert to 2000’s higher levels this year with growth in industrial demand increasing a robust 12%.
“There will be a reverse of fuel switching by industry,” said William Trapmann, senior industry economist at the Energy Information Administration. “But gas prices should remain at just over $2/Mcf at the wellhead in 2002.”
Industry switched to other fuels because of the extraordinarily high gas prices in late 2000 and early 2001. But $2/Mcf gas changed the outlook, he said. Trapmann spoke at Ziff Energy Group’s conference on gas storage in Houston.
Industrial demand for gas will increase in 2002 by 12.6% compared to 2001, according to EIA. For 2003, the growth rate is expected to slip to 3.7%, compared to the previous year. In fact, demand for gas in 2002 is expected to increase for each sector tracked by EIA except electric generation.
EIA projects residential demand will rise 6.2% this year, compared to a 5% decrease in 2001. It expects commercial demand will recover, rising 1.3% this year, compared with 0.5% increase in 2001. Electric generation demand for gas, however, is expected to rise 3.3%, down from a 4.1% growth rate in 2001. It is forecast to fall off again to 1.8% in 2003.
Trapmann disagreed with the conventional explanation of the extraordinarily high gas prices in California for the winter 2000-2001. Many analysts suggested unusually low storage levels going into the winter heating season caused gas prices to spike, he said.
On the contrary, he said, extraordinarily high futures prices for December, compared to the cash price in June, led to low inventory levels, which then triggered the price spike once demand heated up. “The difference in future price and cash price in June versus December more than anything else determines the amount of gas injections to storage,” he said.
The smaller the differential the less injections into storage, he said. The difference between the cash price in June 2000 and futures price in June for 2000 December delivery was only 14¢/Mcf.
The opposite happened with the cash price in June 2001, compared to the futures price for December 2001 contracts, he said. The differential was 68¢/Mcf. Trappman said that explains why gas inventories were so high into the winter this year.
Looking ahead, Trappman said the driver of gas demand will be electric generation. More than half of the growth in gas demand will come from electric generation, he said.