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Record Inventory Levels Prompt EIA to Trim Gas Price Projection -- Again

Record-high natural gas working inventories, which are bulging after mild temperatures held down demand through the winter, have prompted the Energy Information Administration (EIA) to once again revise downward its projection for natural gas prices this year.

In its Short-Term Energy Outlook for May, the agency said it expects gas prices to average $2.45/MMBtu this year. That's down from its April projection of $2.51/MMBtu for the year (see NGI, April 16) and a 72 cent/MMBtu (23%) decrease from its March projection of $3.17/MMBtu (see NGI, March 12).

Driving down the agency's price projection are record seasonal high working inventories. April ended with an estimated 2.61 Tcf in storage, about 46% more than the same time last year.

Henry Hub spot prices averaged $1.95/MMBtu in April, down 23 cents/MMBtu from the March average and the lowest average monthly price since March 1999, EIA said. But the agency expects some price rebound next year, with Henry Hub spot prices forecast to average $3.17/MMBtu in 2013.

For the week ending April 27, working inventories totaled 2,576 Bcf, according to EIA's Weekly Natural Gas Storage Report, an 840 Bcf increase compared to last year and 857 Bcf above the 2007-2011 average. EIA said it expects that inventory levels at the end of October will set a new record high at 4,096 Bcf, "although the record will largely be due to high levels already present at the start of the injection season.

"The projected increase of 1,623 Bcf in working gas inventory during the 2012 injection season (from the end of March to the end of October) is the smallest build since 2002," EIA said. "Limits on storage capacity, as well as high demand from the electric power sector this summer, will limit the overall level of injections." The agency expects working inventory levels next year to recede from record highs, "although they will still remain robust compared with recent history."

Large gains in demand for natural gas in the electric power sector will offset declines in residential and commercial use this year, EIA said. "Because of the much-warmer-than-normal winter this year, EIA expects both residential and commercial consumption to fall by over 6% in 2012," according to the agency, which projects natural gas consumption to average 70.2 Bcf/d in 2012, an increase of 3.4 Bcf/d (5.1%) from 2011 and an upward revision of 0.6 Bcf/d from last month's Outlook. Consumption of natural gas in the electric power sector is forecast to increase by almost 21% in 2012, "primarily driven by the increasing relative cost advantages of natural gas over coal for power generation in some regions." But growth in total gas consumption will slow in 2013, with forecast consumption averaging 71.2 Bcf/d, EIA said.

Strong growth in the total marketed production of natural gas last year -- an estimated increase of 4.8 Bcf/d (7.9%) compared with 2010 -- was driven in large part by increases in shale gas production, according to EIA. The agency expects year-over-year production growth to continue in 2012, albeit at a slower rate as low prices reduce drilling plans. The agency expects growth in U.S. production this year to average 4.4%.

"Declining production from less profitable 'dry' natural gas plays such as the Haynesville Shale are offset by growth in production from liquids rich natural gas production areas such as the Eagle Ford and wet areas of the Marcellus Shale, and associated gas from the growth in domestic crude oil production," EIA said.

Pipeline gross imports are likely to fall by 0.3 Bcf/d (3.3%) this year as domestic supply displaces Canadian sources, and to increase 2.3% in 2013 when near-normal winter weather is expected to drive higher residential and commercial demand.

Liquefied natural gas (LNG) imports are expected to fall by 0.3 Bcf/d (32%) this year. "EIA expects that an average of about 0.7 Bcf/d will arrive in the United States (mainly at the Everett LNG terminal in New England and the Elba Island terminal in Georgia) in both 2012 and 2013, either to fulfill long-term contract obligations or to take advantage of temporarily high local prices due to cold snaps and disruptions," EIA said.

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