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EIA Forecasts Stark Year for Gas Prices, Production and Demand

The Energy Information Administration's (EIA) latest Short-Term Outlook says natural gas prices, production and consumption in the United States are expected to continue on a downward trend this year and possibly beyond.

The Henry Hub gas spot price is projected to fall nearly 50% to an average of $4.70/Mcf this year from an average of $9.13/Mcf in 2008, but then rise to an average of $5.90 in 2010, according to the EIA's March outlook, which was released last Tuesday.

"The Henry Hub spot price averaged $4.65/Mcf in February, 75 cents/Mcf below the average spot price in January. Prices continue to reflect demand reductions brought about by the current economic downturn. As the year progresses, it is expected that average spot prices will remain near $4/Mcf. If prices fall further than currently forecast, natural gas will become increasingly competitive with coal for baseload power generation in some regions," said the EIA, the statistical arm of the Department of Energy.

However, "the current drilling pullback could contribute to higher-than-expected prices if the economy begins to recover earlier than expected and production is slow to react," the agency said.

Total U.S. marketed natural gas production is forecast to remain flat at 58.61 Bcf/d this year and then fall by 0.8% to 58.13 Bcf/d in 2010, the EIA said. Baker Hughes reports 916 gas rigs working in the U.S. as of March 6, a decline of 43% from August 2008. "Consequently the robust growth in natural gas production in the Lower 48 region (excluding the Gulf of Mexico) over the last few years is expected to end as production reaches about 53 Bcf/d in early 2009, then declines during the second half [of the year]," it said.

"The extent of the production decline later this year is highly uncertain and subject to fluctuations in demand and prices over the period. Rig activity is expected to recover in 2010 as the economy improves and prices increase. However, annual average production is still projected to be lower next year because of the decline in new wells drilling this year."

Total gas demand this year is expected to decline as well, by 1.3% to 62.64 Bcf/d from 63.49 Bcf/d in 2008, and then rise by a modest 0.4% in 2010, according to the EIA. "The outlook for continued economic weakness in 2009 is expected to take its greatest toll on industrial sector natural gas consumption, which is expected to decline by about 6% [to 17.16 Bcf/d this year from 18.15 Bcf/d in 2008], more than offsetting the small projected increases in other end-use sectors," the agency said.

It noted that lower delivered gas prices compared with coal in some markets, particularly in the Southeast, are likely to cause some electric power generators to switch some generation from coal to natural gas.

As for demand projections for 2010, slight growth in the industrial sector and 2% growth in the electric power sector are balanced by declines in the residential and commercial sectors because of projected milder winter temperatures, the EIA said.

The agency projects that U.S. imports of liquefied natural gas (LNG) may increase slightly this year to 380 Bcf, with new supply capacity in Qatar, Indonesia and Yemen potentially contributing greater volumes. "However, delays in this new supply capacity as well as uncertainty about the weakness of natural gas demand in other LNG-consuming countries contribute to doubts about [how] much higher LNG imports might be this year. LNG imports in 2010 are projected to be about 460 Bcf as global supply projects ramp up."

Storage inventories at the end of March -- the start of the injection season -- are expected to be about 1.6 Tcf, roughly 200 Bcf above the previous five-year average for that time, according to the EIA.

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