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EIA's 2016 NatGas Price Forecast Edges Up to $2.42/MMBtu, 2017 Stalls at $2.87

Henry Hub natural gas spot prices will average $2.42/MMBtu this year, slightly higher than previously forecast, but firming production and bulging inventories will limit further increases, with 2017 expected to average $2.87/MMBtu, according to the Energy Information Administration (EIA).

After back to back months of increases, EIA's natural gas price forecast in August stood at $2.41/MMBtu for 2016, and the 2017 price forecast was $2.95/MMBtu (see Daily GPIAug. 9).

Henry Hub prices averaged $2.82/MMBtu in August, unchanged from the July average, according to EIA's latest Short-Term Energy Outlook.

"A hot summer and production declines have put some upward pressure on natural gas prices, although prices remain low enough to support significant natural gas-fired generation," the agency said.

"Hurricane Hermine led to the evacuation of several offshore oil and natural gas production platforms and caused some shut-in production. The hurricane-related shut-ins contributed to estimated Gulf of Mexico natural gas production in August that was 5% lower than the July level, but overall U.S. production was still up slightly," according to EIA Administrator Adam Sieminski.

"After a brief slowdown in early 2016, U.S. natural gas production is expected to increase during the second half of this year and continue rising through 2017," and the nation remains on track to become a net exporter of natural gas in 2Q2017, Sieminski said.

Natural gas futures prices for December 2016 delivery (for the five-day period ending Sept. 1) averaged $3.18/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for December 2016 contracts at $2.25/MMBtu and $4.51/MMBtu, respectively.

At this time last year, the natural gas futures contract for December 2015 averaged $2.91/MMBtu and the corresponding lower and upper limits of the 95% confidence interval were $2.08/MMBtu and $4.06/MMBtu, EIA said.

EIA forecast total natural gas consumption to average 76.4 Bcf/d in 2016 and 77.1 Bcf/d in 2017, compared with 75.2 Bcf/d in 2015. Increases in total gas consumption this year are mainly because of electric power sector use of natural gas, which EIA expects will increase by 5.4%. Driven by competitive economics relative to coal and by warmer-than-normal temperatures, the amount of electricity generated using natural gas reached a record high during July, surpassing a record set in July 2015.

Natural gas use in the electric power sector is forecast to decline by 2.3% in 2017 as rising gas prices contribute to increasing coal use for electricity generation.

"The price of natural gas delivered to electric generators averaged $2.23/MMBtu in March of this year, which was the lowest price (in nominal terms) since 1999," EIA said. "Low natural gas prices have encouraged the power industry to use more of the fuel for electricity generation…

“Natural gas prices have increased in recent months, and EIA expects this trend to continue through the forecast horizon, with the delivered natural gas price reaching almost $4.00/MMBtu by the end of 2017. These higher prices should encourage more electricity generation from coal-fired power plants during 2017."

Meanwhile, industrial sector consumption is expected to increase by 2.3% this year and by 1.0% next year, as new fertilizer and chemical projects come online.

Last week, EIA reported natural gas inventories at 3,401 Bcf, and storage at the end of March was 2,496 Bcf, the highest end-of-withdrawal-season level on record (see Daily GPISept. 1a). Despite lower-than-average storage injections, the agency expects inventories to be 4,042 Bcf at the end of October, which would be a record-high level for that time of year.

Marketed production in June, the month of the most recent survey data, averaged 77.5 Bcf/d, down 2.7 Bcf/d from the record-high daily average production in February.

But more recent preliminary daily data from third-party sources indicate production increased in July and August, EIA said, and production increases in the second half of 2016 and through 2017 are expected in response to forecast increases in prices and in liquefied natural gas (LNG) exports. The agency forecast natural gas production to increase by 0.6% this year and by 3.0% next year.

For the second consecutive month, the United States in June sent the most natural gas to Mexico through pipelines of any month on record, reaching 105.84 Bcf (3.53 Bcf/d), according to EIA data (see Daily GPISept. 1b). June 2016 pipeline exports to Mexico were significantly higher than June 2015 (90.72 Bcf, or 3.02 Bcf/d).

Natural gas pipeline exports to Mexico have risen this year, and EIA expects that growth to continue because of growing demand from the country’s electric power sector and because of flat natural gas production in Mexico.

EIA projects LNG gross exports will increase to an average of 0.5 Bcf/d in 2016, with the startup of Cheniere Energy's Sabine Pass LNG plant in Louisiana, which sent out its first cargo in February (see Daily GPIFeb. 24). EIA projects gross LNG exports will average 1.5 Bcf/d in 2017 as Sabine Pass ramps up its capacity.

With expected growth in gross exports, net imports of natural gas are forecast to decline from 2.6 Bcf/d in 2015 to 0.2 Bcf/d in 2017.

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