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EIA Maintains Bullish Outlook on Supply Concerns, Booming Crude

Citing the booming crude oil market and continuing concerns about long-term natural gas supply, the Energy Information Administration (EIA) slightly raised its Henry Hub gas price forecast for the year in its Short Term Energy Outlook to $8.11/MMBtu from the $8.07 it predicted in last month's Outlook, and sharply increased its gas price forecast for 2007 to $9.17 from its April prediction of $8.39.

"Spot Henry Hub natural gas prices, which averaged $9.00/Mcf in 2005, are expected to fall to an average of about $7.00/Mcf over the next few months (from an average of $13.44/Mcf in December)," EIA said. "Thus, barring extreme weather conditions for the rest of the year, 2006 should see an easing in spot natural gas prices, leading to an annual average decline in the Henry Hub price to about $8.11/Mcf. The respite is expected to be short-lived. Concerns about potential future supply tightness and continuing pressure from high oil market prices will likely drive spot natural gas prices for the next heating season to previous highs, with the Henry Hub spot price projected to again rise to just under $11.00/Mcf."

EIA said prospects for significant improvement in the world petroleum supply and demand balance "appear to be fading." While U.S. crude oil production is expected to grow this year largely due to the recovery from the hurricanes, only moderate production and productive capacity increases are expected worldwide. "Steady and continued growth in world oil demand will likely combine with only modest increases in world oil production capacity, leaving little room to increase production in the event of geopolitical instability," the agency said. "Crude oil prices will remain high through 2007." EIA expects West Texas Intermediate spot prices to average $67.73/bbl this year and $67.92 next year.

By September, EIA expects oil and gas prices to be lower than last year because of the return of production and refineries affected by last year's hurricanes. But with another active hurricane season possible this year, any hurricanes that threatens the Gulf likely will add to price volatility. EIA said its projections don't reflect a scenario with significant production or refinery outages.

While EIA projects that natural gas demand will be down about 240 Bcf this year, or about 1.1%, due to the warm January weather and much weaker cooling load expected this summer, demand is projected to increase by 700 Bcf next year (3.4%).

Because of the unusually warm January this year, residential consumption is projected to fall by 5.1% from 2005 levels but then increase by 6.5% in 2007. The consumption of natural gas for power generation is expected to fall by 2.8% in 2006, then increase by 2.3% in 2007. Meanwhile, recovery in natural gas-intensive industrial output following the 2005 hurricanes will likely contribute to growth in industrial gas consumption this year (3.5%) and in 2007 (2.3%), EIA said.

Domestic dry natural gas production declined by 2.8% last year due to the hurricanes but is expected to rise 0.8% this year and 1.6% in 2007. Liquefied natural gas imports are expected to increase to 740 Bcf this year and 970 Bcf next year from 630 Bcf in 2005.

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