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EIA Raises Projections for Summer, Annual Spot Gas Prices

Citing the sweltering temperatures, power generation demand and record crude oil prices, the Energy Information Administration (EIA) in its Short-Term Energy Outlook for July said it sees spot natural gas prices averaging $7.41/Mcf through the end of September, up from its previous projection of $6.50-$7.00 for the remainder of the summer (see NGI, June 13).

"The Henry Hub natural gas spot price averaged $7.36/Mcf in April 2005, fell to $6.66/Mcf in May, then bounced back to $7.40 in June as hot weather in the East and Southwest increased natural gas-fired electricity generation for cooling demand and as crude oil prices soared. The natural gas market is likely to stay tight over the next few months when summer cooling demand is at its height," said the EIA, the statistical arm of the Department of Energy, in its latest outlook issued last Tuesday.

The agency predicts that monthly average spot prices will likely near $7.90 by the end of the year, up from its previous projection of $7.50. "Although natural gas storage remains above the five-year average, high world oil prices, continued strength in the economy, the expectation that Pacific Northwest hydroelectric resources will be below normal through mid-summer, and limited prospects for growth in domestic natural gas production all support the natural gas price projections."

The EIA estimates that Henry Hub prices will now average $7.21 for this year, up from last month's projection of $6.90 for 2005. It also raised its forecast for average spot prices in 2006 to $7.41 from $7.10.

Although weekly gas storage injections are coming in under industry projections, the EIA said the market is in good shape storage-wise. It noted working gas in storage was estimated at 2,186 Bcf for the week ended July 1, up 8% over a year ago and 12% above the five year average. The agency predicts that 3.11 Tcf will be in storage by the end of the year, a level that is considered adequate to meet winter gas demand.

The EIA revised downward its projection for gas demand growth in 2005. It now predicts that gas demand will increase by 1.7% to 22.8 Tcf this year. Last month, it forecast a 2% increase in demand for the year. The agency said it sees gas demand growing by another 2.4% to 23.35 Tcf in 2006 "due to an assumed return to normal weather and to continued strength in consumption for electric power production."

The EIA said it expects domestic gas production in 2005 and 2006 to remain near the 2004 level (18.83 Tcf), despite a 12% annual average increase anticipated in natural gas-directed well completions.

On the electric side, the EIA said demand is likely to rise by 3% in 2005 to 3838.8 billion kilowatthours and by an additional 1.5% in 2006 to 3895.1 billion kilowatthours due largely to continuing economic growth, following an estimated electricity demand growth of 1.6% in 2004.

"A very hot June is likely to generate a solid increase in demand in the second quarter of 2005. Also, third and fourth quarter 2005 year-over-year electricity demand growth rates are expected to be particularly strong, as cooling and heating demands are likely to be higher than in the mild third and fourth quarters of 2004."

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