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Prices Ease, Supply Picture Improves Slightly in EIA's Latest Outlook

With the heating season now about two-thirds over and with ample natural gas remaining in storage, natural gas prices are likely to ease over the next several months, the Energy Information Administration (EIA) said in its February Short-Term Energy Outlook. However, with crude oil prices expected to remain over $40/bbl through 2006, and with the continuing tight gas supply/demand situation over the same period, Henry Hub prices should remain at about $5.45-$5.75/Mcf annually for the 2005 to 2006 period, the agency said.

Because of continued economic growth, gas demand is projected to increase by 3% to 22.86 Tcf in 2005 compared to 2004 levels, while domestic dry gas production is expected to rise only 1.6% to 18.96 Tcf. Gas imports are expected to increase 4.8% this year to 3.52 Tcf, including a 32% increase in imports of liquefied natural gas to 860 Bcf (2.4 Bcf/d). EIA expects a 41% increase in LNG imports next year to 1.21 Tcf (3.3 Bcf/d).

Contrary to analysts' reports, such as Lehman Brothers' recent projections for a 3% drop in domestic production this year (see related story), EIA said domestic gas production will grow due to high gas-directed drilling rates and partly due to continued recovery in the Gulf of Mexico from the effects of Hurricane Ivan. EIA predicts that domestic gas production will be down 1.9% in the first quarter from 1Q2004 levels, flat in the second quarter, up 2.2% in the third quarter and up 6.4% by the fourth quarter to 4.84 Tcf (or 53.8 Bcf/d).

"Steady increases in [LNG] imports, restrained export growth, and carryover from the robust storage levels noted above are expected to contribute to moderate improvement in the supply picture in 2005," EIA said in its outlook.

Nevertheless, consumer wallets will be quite a bit lighter by springtime. Expected increases in expenditures for natural gas-heated households in the Northeast remain at 10%. Heating oil expenditures by typical Northeastern households are expected to average 32% above last winter's levels, with residential fuel oil prices averaging $1.82/gallon for the October-to-March period. Expenditures for propane-heated households are expected to increase about 20% this winter.

The average Henry Hub natural gas spot price was $6.78/Mcf in December and $6.32/Mcf in January, EIA said. The unusually mild winter weather in the Northeast this past December reduced heating demand, which, in turn, lowered spot prices for natural gas in January. Working gas in storage is estimated to have totaled 2,021 Bcf at the end of January, which is 15% higher than one year ago and 17% higher than the five-year average.

EIA expects gas prices at the Henry Hub to average $5.45 this year and $5.77 next year compared to $6.06 in 2004. Those projections are down slightly from last month's outlook.

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