Natural gas prices this year and next will be slightly higher than previously forecast, lifted in large part by an expected increase in demand from the industrial sector, the Energy Information Administration (EIA) said Tuesday.

In its Short-Term Energy Outlook for June the agency said it expects gas prices to average $2.55/MMBtu this year, an increase from the $2.45/MMBtu forecast EIA issued last month (see Shale Daily, May 9) and the April projection of $2.51/MMBtu. In its March projection, EIA had said it expected prices to average $3.17/MMBtu this year.

The uptick is due to an expected increase in industrial gas consumption — up 0.8% this year and 1.8% in 2013, according to EIA estimates — along with decreases in natural gas production and rig counts, said EIA administrator Adam Sieminski.

“With gas prices as low as they are, it’s leading to greater use of natural gas in a lot of industrial applications. It’s very attractive in the chemical and petrochemical industry, and lower prices are causing some industrial users who have the ability [to switch] — not so much electric utilities, but at the industrial level…,” Sieminski said during a conference call Tuesday. “I suspect that we are going to see industrial demand looking a bit stronger than you would otherwise have assumed at these price levels. I think you could have natural gas prices go up as we’re assuming for next year and still have growth in industrial consumption because even the prices that we’re talking about are still relatively low from a historical standpoint.”

EIA said natural gas futures prices — for September 2012 delivery (in the five-day period ending June 7) — averaged $2.48/MMBtu, with an average implied volatility (IV) rating of 53%, compared to a 35% IV rating from June 2011. The lower and upper bounds for the 95% confidence interval for September 2012 contracts are $1.51/MMBtu and $4.07/MMBtu, respectively, compared to $3.30/MMBtu and $6.50/MMBtu from last June.

For the week ending June 7, working inventories totaled 2,877 Bcf, according to EIA’s Weekly Natural Gas Storage Report, a 174 Bcf increase compared to last year and 687 Bcf above the 2007-2011 average.

“Because we came into the spring with inventories very high, the actual additions over the build season during the summer and early fall may be relatively low, but we’re going to end up with a storage number in our forecast that’s pushing up towards the very high end and might even exceed the highest number that we’ve had,” Sieminski said. EIA expects inventory levels at the end of October will set a new record high at 4,015 Bcf, and said working inventory levels in 2013 “will still remain robust compared with recent history.”

EIA expects that natural gas consumption will average 69.5 Bcf/d in 2012, an increase of 2.7 Bcf/d (4.1%) compared with 2011, and should increase further to 71.3 Bcf/d in 2013.

Projected consumption of natural gas in the electric power sector is expected to grow by nearly 20% this year, “primarily driven by the increased relative cost advantages of natural gas over coal for power generation in some regions,” EIA said. “Consumption in the electric power sector peaks in the third quarter of 2012 at 30.2 Bcf/d, when electricity demand for air conditioning is highest. This compares with 27.7 Bcf/d during the third quarter of 2011.”

Liquefied natural gas (LNG) imports are expected to fall by 0.3 Bcf/d (33%) this year, while pipeline gross imports will fall by 0.4 Bcf/d (4.3%) as domestic supply displaces Canadian sources.

The geographic diversity of the nation’s shale plays is helping to defuse one of the natural gas industry’s persistent problems: bottlenecks, Sieminski said.

“In the past there was a lot of effort being devoted to figuring out basis risk and basis price differentials…because of the issues of transportation differentials, which would include things like bottlenecks that would lead to problems,” he said. “One of the interesting results of shale gas development is that it is taking place geographically in a much greater spread of states, [and] we’re beginning to reduce basis issues and gas prices are tending to level out competitively in their local markets…What we’re finding is that Pennsylvania is its own natural gas market now, and it doesn’t matter as much what prices are in Texas or Louisiana. As shale gas development proceeds, I suspect you’ll see more of that.”