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EIA Sees Continued Pressure on Gas, Oil and Power Prices

Prices for natural gas, crude oil and electricity, which already are alarmingly high, are expected to continue their upward climb through the end of the year or longer, according to the Energy Information Administration's (EIA) Short-Term Energy Outlook for July.

The Henry Hub spot price for natural gas averaged $13.07/Mcf last month, up $1.42/Mcf from the average price in May of this year and about $5 higher than last year at this time. "Despite significant onshore production growth, the natural gas market continues to be pressured by high oil prices, low LNG [liquefied natural gas] imports and a widening year-over-year storage deficit," said the EIA report, which was released last Tuesday.

"In addition, summer cooling demand was strong in June (cooling degree days in June were 15.7% more than last year and 23.5% more than normal), which increases the amount of natural gas used in the electricity power sector," the agency said. On an annual basis, it expects the Henry Hub spot price to average about $11.86/Mcf this year and $11.62/Mcf in 2009.

The spot price for West Texas Intermediate (WTI) crude oil rose to $145/bbl on July 3, up from $122/bbl in early June. "Global supply uncertainties, combined with significant demand growth in China, the Middle East and Latin America are expected to continue to pressure oil markets," the EIA noted. WTI prices, which averaged $72/bbl in 2007, are projected to average $127 /bbl this year and $133/bbl in 2009, according to the EIA. It also sees the average price for regular-grade gasoline, which was about $4.10/gallon in late June, remaining above the $4 mark until the fourth quarter of 2009.

And "rapidly increasing delivered fuel costs for power generation, particularly for natural gas, are pushing up electricity prices. Residential electricity prices are projected to increase by an annual average of about 5.2% [to 11.2 cents/kWh] in 2008 and 9.8% [to 12.3 cents/kWh] in 2009 compared with an increase of 2.2% in 2007," the agency said.

On the supply side, the EIA sees total U.S. marketed natural gas production growing by 6.4% this year to 58.75 Bcf/d and by 1.6% to 59.66 Bcf/d in 2009. Production from the federal area of the Gulf of Mexico is expected to drop by 1.3% to 7.49 Bcf/d this year due to unplanned repairs on key infrastructure in the region, namely the Independence Hub.

However, the agency expects natural gas production in the Lower 48 onshore region to grow by 7.9% to 50.09 Bcf/d this year, more than offsetting the declining production in the Gulf. In 2009, gas production from the federal Gulf region is projected to rise by 2.5% 7.68 Bcf/d, while the Lower 48 production is likely to increase by only 1.4% to 50.80 Bcf/d, according to the EIA.

Meanwhile, the EIA sees total gas consumption climbing by 2.1% to 64.48 Bcf/d in the current year and by 1.1% to 65.21 Bcf/d in 2009. "Year-over-year increases are expected in every sector in 2008 and have been largely weather-driven thus far. In 2009, residential and commercial sector consumption is expected to be relatively unchanged while natural gas consumption for electricity generation is expected to increase by 3.2%" to 19.62 Bcf/d, the agency said. Gas demand by the electric generation sector is projected to be 19.01 Bcf/d this year, up from 18.83 Bcf/d in 2007.

Import volumes of LNG to the United States "continued to sag," the EIA noted. "Through the first half of 2008, LNG imports were roughly 60% below the amount received during the corresponding period last year. While demand for LNG supplies remains strong in Asia-Pacific and Europe, prices in the United States are becoming more competitive and may attract additional shipments in the coming months. LNG imports in 2007 totaled about 770 Bcf; however, delays in new liquefaction projects and persistent world demand are expected to result in a 250 Bcf decline in U.S. LNG imports" this year.

In 2009, the EIA says it sees LNG imports reaching nearly 790 Bcf as new supply enters the global market.

As for inventoried gas, working gas in storage in late June was 2,118 Bcf. Current inventories are now 57 Bcf below the five-year average and 381 Bcf below the level during the corresponding week last year.

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