Gas Price Lows

U.S. natural gas prices sink to 29-month lows

By Joseph Silha

NEW YORK (Reuters) - U.S. natural gas prices hit a 29-month low

Wednesday, pounded by fears of dwindling demand in the face of a sagging

economy and near-record supplies heading into the winter heating season,

industry analysts said.

"This year, we've seen a dramatic shift in the overall supply-and-demand

balance. We've had increasing domestic production, large Canadian

imports, and manufacturing demand is way down," said Kyle Cooper, vice

president at Salomon Smith Barney in Houston.

On Wednesday, Henry Hub natural gas futures on the New York Mercantile

Exchange fell to $2.09 per million British thermal units, a 29-month low

for the spot month contract.

Henry Hub in Louisiana, where some of the country's biggest pipelines

converge, is the benchmark delivery point for wholesale pricing of most

of the country's natural gas.

Since tight supplies and an Arctic cold snap sent prices to a record high

of $10.10 last winter, gas prices have been steadily eroding, weakened by

new supplies on the market and a surprisingly strong conservation effort

by homeowners and industries alike.

DEMAND DOWN, SUPPLIES UP

The Energy Information Administration in Washington expects overall U.S.

gas consumption this year to slip 1.3 percent to about 22.4 trillion

cubic feet (tcf).

Analysts said the industrial sector was expected to be the biggest loser,

with demand off a whopping 8 percent to 10 percent.

"The economic conditions don't look very bright for a recovery in the

industrial sector," said Kevin Petak, director at consultants Energy and

Environmental Analysis in Virginia.

At the same time, supplies have been growing, with record drilling

increasing gas production by about 1.6 percent.

Analysts said a fairly mild summer and the sluggish economy helped

restore the supply-demand balance despite a nationwide construction boom

in new gas-fired power plants.

HIGH INVENTORIES THE FOCUS

But they said flush gas inventories ahead of the peak-demand winter

heating season have made the biggest difference from last year and should

erase any fears consumers might have of running short on supplies.

Recent data from the American Gas Association, an industry trade group,

showed U.S. natural gas inventories stood at 2.7 tcf, or about 81 percent

full, and should top a comfortable 3.1 tcf if storage operators merely

match last year's modest storage pace during the remaining eight weeks of

the stock-building season.

"We're going to start the winter with more gas in storage than we've ever

had. It may take an Ice Age to revive the market," Cooper said, adding he

expected front-month futures prices to dip below $2.00 before winter.

NO WINTER PRICE SHOCKS EXPECTED

Even with a cold winter, some analysts said, it will take time for the

market to rebalance, raising hopes of low heating bills this year

following last winter's brutal price shock.

"Consumers should see more moderate gas prices this winter and lower

heating bills ... that's for sure," Petak said.

But in the longer term, analysts said, lower prices will sow the seeds

for a rebound.

Tom Ebbern, senior oil and gas analyst at TD Newcrest Capital in Calgary,

said gas was currently cheap enough to attract some fuel buyers away from

oil.

"At these levels, there's significant incentive to switch to natural gas

and that will help correct the imbalance much quicker than waiting for

the economy to recover ... but the next few months could be ugly," Ebbern

said.

He also warned that gas prices below $2.00 could prompt some producers to

turn off their wells and slow drilling, factors that would eventually

retighten supplies.

15:58 09-19-01