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EIA Lowers End-of-Season Storage, Raises Price Forecast

Working natural gas inventories remain at historically high levels for this time of year, the Energy Information Administration (EIA) said in its Short Term Energy Outlook for August. While it said inventory levels at the end of October will set a new record of 3,954 Bcf, that's a small walk-back from the 4,000 Bcf EIA predicted last month.

"Though absolute levels of working inventories remain high (because of very high storage entering the summer injection season this year), builds since April, for the most part, have been below the five-year average and below last year's levels," EIA said. "The projected increase of 1,477 Bcf in working gas inventory during the 2012 injection season (from the end of March to the end of October) would be the smallest build since 1991.

"In 2013, working inventory levels recede from current record highs, although they will still remain abundant compared with recent history."

Natural gas spot prices averaged $2.95/MMBtu at the Henry Hub in July, up 49 cents/MMBtu from the June average but still $1.47/MMBtu (33%) lower than the July 2011 average.

"While abundant supplies have kept prices relatively low, a hot summer and associated increases in demand for natural gas for power generation contributed to the increase in prices in July," the agency said. EIA expects the Henry Hub natural gas price will average $2.67/MMBtu in 2012, with prices remaining below $3.00/MMBtu until December. EIA expects 2013 prices will average $3.34/MMBtu. The latest forecast marks and increase from the previous one.

One month ago in its previous Outlook EIA said it expected that Henry Hub prices would average $2.58/MMBtu in 2012, with modest monthly increases through the rest of the year, and 2013 prices would average $3.22/MMBtu (see NGI, July 16).

EIA said it expects that gas consumption will average 69.8 Bcf/d in 2012, an increase of 3.2 Bcf/d (4.8%) from 2011. Large gains in electric power use in 2012 will more than offset declines in residential and commercial use. Projected consumption in the power sector averages 25.4 Bcf/d in 2012, 22% higher than in 2011, primarily driven by the improved relative cost advantages of natural gas over coal in some regions. Consumption in the power sector during 2012 peaks at 31.6 Bcf/d in the third quarter, when electricity demand for air conditioning is highest. As a result of the extreme heat in July, estimated power sector gas consumption during the month averaged 34.8 Bcf/d, 1.8 Bcf/d higher than projected in last month's Outlook.

Growth in total natural gas consumption slows in 2013, with forecast consumption averaging 70.9 Bcf/d. Growth in 2013 is driven by consumption increases from the residential, commercial and industrial sectors as consumption in the power sector levels off. A forecast of near-normal weather next winter drives 2013 increases in residential and commercial consumption of 9.2% and 6.4%, respectively. Although projected natural gas burn in the power sector declines by 3.5% from 2012, it remains near historically high levels in 2013, EIA said.

The gas-fired power outlook is similar to what EIA described in its previous Outlook.

Marketed gas production grew by 4.8 Bcf/d (7.9%) in 2011. "This strong growth was driven in large part by increases in shale gas production," the agency said. "EIA expects continued year-over-year growth in 2012 of 2.5 Bcf/d. EIA, however, expects a small drop in production in the coming months, reflecting both expected losses from hurricanes and declines related to recent drops in the rig count."

According to Baker Hughes, the natural gas rig count was 498 as of Aug. 3, compared with 811 at the start of 2012. While some declines in production have occurred so far in 2012, production remained flat from April to May, EIA said. Declining production from less-profitable dry natural gas plays such as the Haynesville Shale, as well as the continued long-term decline in the Gulf of Mexico, is offset by growth in production from liquids-rich 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, the agency said.

EIA expects pipeline gross imports will fall by 0.1 Bcf/d (1.3%) in 2012 as domestic supply continues to displace Canadian sources. The warm winter in the United States also added to the year-over-year decline in imports, particularly to the Northeast. EIA said it expects pipeline gross imports will remain flat in 2013 at about 8.4 Bcf/d. Pipeline gross exports grew by 1.0 Bcf/d (33%) in 2011, driven by increased exports to Mexico, but they are expected to remain flat in 2012 and grow by 0.2 Bcf/d in 2013.

Liquefied natural gas (LNG) imports are expected to fall by 0.5 Bcf/d (51%) in 2012 from 2011 levels. EIA expects that an average of about 0.5 Bcf/d and 0.6 Bcf/d will arrive in the United States (mainly at the Elba Island terminal in Georgia) in 2012 and 2013, respectively, either to fulfill long-term contract obligations or to take advantage of temporarily high local prices due to cold snaps and disruptions. Higher prices for LNG, particularly in Asian markets, have made the U.S. a market of last resort for LNG.

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