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EIA Sees Spot Gas Prices Averaging $8.50/Mcf in Fourth Quarter

Citing record crude oil prices, limited growth in natural gas production and the potential impacts of hurricanes, the Energy Information Administration (EIA) in its Short-Term Energy Outlook for August projected that Henry Hub spot gas prices will average $8.50/Mcf in the fourth quarter, up from its previous estimate of $7.90/Mcf.

"The natural gas market is likely to stay tight over the next couple of months, with prices projected to rise further as the winter heating season increases demand," hitting $8.50/Mcf in the final period of 2005, said the statistical arm of the Department of Energy (DOE) in its latest outlook, which was released last week.

"Although natural gas storage remains above the five-year average, several factors are expected to continue to support high natural gas prices, including high world oil prices, continued strength in the economy, the expectation that Pacific Northwest hydroelectric resources will be below normal through the rest of the year, limited prospects for growth in domestic natural gas production, and concerns about the potential effects of hurricanes," the agency said.

In July, the EIA reported that gas spot prices averaged $7.86/Mcf as hot weather in the East and Southwest regions increased gas-fired electricity generation for cooling demand and crude oil prices soared to record levels.

Depending on the region of the country, overall increases for 2005 in natural gas spot prices are likely to range between 18% and 25% above the 2004 average, according to the EIA. Citygate prices and end-use prices are expected to experience double-digit percent increases for the second year in a row in most regions of the nation, it noted.

For the upcoming winter, the EIA said pressure on delivered gas prices may be sharpest in regions where heating demands are likely to increase the most, such as in the central portion of the United States. The Northeast is likely to see less severe rises in delivered natural gas prices during the winter heating season since significant increases in heating demand are not expected there, it noted.

The EIA now estimates that gas spot prices will average $7.63/Mcf for the year, up from its previous projection of $7.21/Mcf. However, it lowered its forecast for average spot prices in 2006 to $7.34/Mcf from its prior estimate of $7.41/Mcf.

Working gas storage was estimated at 2.42 Tcf for the week ending July 29, 2.2% higher than a year ago and 7.6% above the five-year average. "Above-average storage levels are expected to persist through 2005, assuming that strong injection levels resume following the recent cooling-related surge in demand in the power sector. However, a normal winter for 2005-2006 would probably eliminate any storage surplus," the EIA said.

The EIA estimated that gas demand will rise 1.8% to 22.84 Tcf this year, and by 2.4% to 23.4 Tcf in 2006 due to an "assumed return to normal weather and continues strength in consumption for electric power production."

The agency predicts that gas production this year and in 2006 will remain flat with the 2004 level, "despite a 16% annual average increase expected in natural gas-directed well completions." Preliminary EIA data through May and the projection for June yield an apparent decrease in natural gas output of about one percent for the first half of 2005 compared to the same period in 2004. Improvement in the second half depends mostly on the assumed recovery from the disruption caused by Hurricane Ivan in 2004, the EIA said.

Meanwhile, imports of liquefied natural gas (LNG) into the U.S. appear to have exhibited minimal year-over-year increases (on average) through the first half of 2005, according to the EIA. Currently, total LNG imports for 2005 are expected to be approximately 690 Bcf compared to 650 Bcf in 2004, it said. Approaching 700 Bcf for all of 2005 is likely only if a solid improvement in import levels materializes for the fall.

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