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EIA Maintains Bullish Forecast Despite Recent Price Declines

Regardless of the recent major declines in gas prices, the Energy Information Administration (EIA) remains firmly in the natural gas bulls' camp, predicting that spot Henry Hub gas prices, which averaged $9.00/Mcf in 2005 will average $11.25/Mcf ($10.92/MMBtu) in the first quarter of 2006 and $9.80/Mcf for the year. Last month, EIA's forecast was $11.48 for the first quarter and $9.30 for the year. Henry Hub prices currently are about $8.60/MMBtu ($8.35/Mcf).

"The market is very tight and volatile right now with the Gulf outages, and you see the spot and futures markets right now reflecting warm weather and the build in inventories [earlier this month], but we're cautious because as soon as the cold weather returns, the market being tight as it is, the prices are likely to rebound," EIA Economist Tankred Lidderdale said in an interview with NGI following the release of EIA's January Short Term Energy Outlook. "We did lower the [first quarter] prices some, but we're not willing to jump on the bandwagon yet.

"We still have significant volumes out in the Gulf. We have constraints on imports. As I said, we are unwilling to send households a message that the bad times are over."

The government agency's estimate of winter heating expenditures shows slight reductions from its previous Outlook. However, 2005-2006 winter residential space-heating expenditures are still projected to be much higher relative to the winter of 2004-05. "On average, households heating primarily with natural gas likely will spend $257 (35%) more for fuel this winter than last winter," EIA said in its Outlook. "Households heating primarily with heating oil can expect to pay, on average, $275 (23%) more this winter than last. Households heating primarily with propane can expect to pay, on average, $184 (17%) more this winter than last. Households heating primarily with electricity can expect to pay, on average, $72 (10%) more than last winter. Should colder-than-normal weather prevail, expenditures could be significantly higher than currently projected."

The major factor that has held natural gas prices higher has been the hurricane related outages in the Gulf of Mexico and Gulf Coast region and Lidderdale noted that some Gulf fields probably will be completely lost because they "just won't be economical to bring back online." That happened with Hurricane Ivan in 2004. "Those are going to be replaced by new fields. But we can't really put a number on that yet. We're expecting to be down to about 0.6 Bcf/d [of offshore production shut-ins] by March."

EIA predicts U.S. dry gas production will total 18.78 Tcf in 2006 and 18.97 Tcf in 2007 compared to 18.09 Tcf in 2005. "Our U.S. dry gas production hit a low in October of 44.38 Bcf/d," said Lidderdale. "In December, we're looking at 49.11 Bcf/d. That's a 10% increase just in the last two months. But if you look at December 2004, 50.95 Bcf/d was being produced. We're still well below where we were last year."

EIA expects net imports to reach 3.75 Tcf in 2006 and 3.88 Tcf in 2007 compared to 3.46 Tcf in 2005. LNG imports are expected to rise to 0.95 Tcf this year and 1.20 Tcf next year compared to 0.84 Tcf in 2005. Total gas demand is predicted to continue growing steadily to 22.47 Tcf in 2006 and 22.76 Tcf in 2007 compared to 22.42 in 2005.

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