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EIA Sees Prices Falling, Consumption Flattening

The worldwide economic slowdown continues to reduce global energy demand, leading to additional declines in energy prices, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for December.

The economic recession in the United States is contributing to lower natural gas wellhead prices, with the Henry Hub spot price projected to drop from an average $9.17/Mcf in 2008 to $6.25/Mcf in 2009, the EIA said in the outlook, which was released last Tuesday.

"Natural gas prices, which have declined from a monthly average of $13.06/Mcf in June, reflect the impact of increased domestic production, the weak economy and lower oil prices," EIA said. "While these factors are expected to lead to lower natural gas prices throughout the forecast period, the pass-through of higher natural gas prices paid earlier in the year for supplies that will be called upon to meet winter demand is expected to contribute to a small increase in heating expenditures this winter for households that use gas as their primary heating fuel." The Henry Hub spot price averaged $6.87/Mcf in November.

The EIA projections follow a report from Barclays Capital that found that producers are laying down natural gas rigs in some of the most prolific basins in the United States, but not fast enough to eliminate reserves growth, which could lead to an all-time inventory high by this time next year (see NGI, Dec. 8). Barclays pegged gas prices in 2009 to average $6.36/MMBtu with a rebound unlikely before the spring of 2010. FBR Capital Friday cut its forecast for U.S. gas prices and estimated they would average $5/Mcf in 2009 (see related story).

According to EIA, total natural gas consumption this year is expected to be higher in every sector except for electric power -- primarily due to a projected 5.3% increase in heating degree days compared to last year -- an increase of 0.5% overall.

"In 2009 consumption in the residential, commercial, and electric power sectors is expected to grow, albeit slightly," EIA said. "However, poor economic conditions both domestically and worldwide are expected to hamper U.S. industrial production activities through the forecast period. As a result, natural gas consumption in the industrial sector is expected to decline by 2.4% in 2009."

EIA expects U.S. marketed natural gas production to increase by 5.4% in 2008 and by 0.9% in 2009. Domestic gas production continues to surge due to strong growth in the Lower 48 onshore, where annual average production is expected to increase by 9.1% this year, but a dip in recent drilling activity, reflecting lower average prices and poor economic conditions, is expected to limit onshore production growth to 0.8% next year. Production outages in the Gulf of Mexico (GOM) caused by hurricanes Gustav and Ike led to a decline in offshore production of 14.5% in 2008 and GOM production is expected to increase by just 1.8% in 2009, EIA said.

Liquefied natural gas imports, which are expected to total about 360 Bcf this year and slightly more than 400 Bcf in 2009, remain well below the 770 Bcf the country imported in 2007, EIA said.

Storage inventories were 3,358 Bcf at the end of November, 69 Bcf above the five-year average and 107 Bcf below the level during the corresponding period last year.

Slight growth in the commercial and industrial sectors, balanced by decline in the residential sector -- primarily a result of milder summer temperatures -- is expected to produce flat electricity consumption this year compared to 2007 levels, according to EIA. Total electricity consumption is expected to decline in 2009 due to slow growth in new housing construction and reduced demand in the industrial sector.

Residential electricity prices are expected to rise by 6% this year and by a further 5% next year, EIA said.

Electric power sector coal consumption grew 1.3% in for the first half of 2008, but a decline in third quarter electricity consumption is expected to limit sector coal consumption growth to only 0.3% for all of 2008, according to EIA. An expected decline in electricity consumption next year, combined with projected increases from other generation sources, including nuclear, natural gas, petroleum, and wind, will contribute to a projected 0.2% decline in sector coal consumption.

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