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EIA Sees Downward Trend for Much of Gas Market

Nearly all the key economic barometers for natural gas markets are expected to continue heading south this year, with the exception of Gulf of Mexico (GOM) gas production, U.S. imports of liquefied natural gas (LNG) and the level of working gas inventory, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for May.

"The Henry Hub spot price averaged $3.62/Mcf in April, 46 cents/Mcf below the average spot price in March, as consumption flagged amidst the drop in economic activity," said the agency outlook, which was released last Tuesday. "No significant rise in average spot prices is expected until cooler temperatures increase the demand for space heating in the fall," the EIA said, but even then "robust storage levels are expected to limit any significant upward price movement through the winter."

As anticipated improvement in the economy contributes to demand recovery in 2010, "sustained lower production levels could lead to higher prices in the latter part of the forecast period," the EIA projected. For this year, the agency sees the Henry Hub spot price averaging $4.06/Mcf, increasing to an average of $5.21/Mcf in 2010.

Total domestic marketed natural gas production is projected to fall by 1% this year to 57.98 Bcf/d from 58.59 Bcf/d in 2008, and then decline again in 2010 by 2.8% to 56.36 Bcf/d, according to the EIA. Total working gas rigs have dropped by 54% since last August. "The erosion of drilling activity combined with production curtailments in response to current and projected low prices and high inventory levels are expected to cause natural gas production in the Lower 48 non-GOM to decrease by about 1.6% [to 50.26 Bcf/d this year]," the agency noted.

"Conversely marketed production from the federal GOM is expected to increase by 3.4% [to 6.63 Bcf/d this year] due to the return of facilities damaged by hurricanes Gustav and Ike as well as the start-up of the new production associated with offshore oil projects. [But] despite expectations of higher prices next year, the lagged effects of the downturn in drilling this year and the natural decline in productivity from existing wells are expected to contribute to lower production in both the Lower 48 non-GOM and federal GOM regions in 2010."

On the brighter side, "expected weak natural gas demand in the...LNG-consuming countries of Asia and Europe, the start-up of new liquefaction capacity and limited natural gas storage capacity in countries that typically rely on LNG are expected to increase the availability of LNG for the United States," the EIA said. It projects that U.S. LNG imports will increase to about 500 Bcf this year from 350 Bcf in 2008, and then rise to 650 Bcf in 2010. But the agency cautioned "there is significant uncertainty associated with the global LNG balance."

As for demand, "the projected steep decline in industrial output this year is expected to reduce industrial natural gas consumption by 8% [to 16.71 Bcf/d from 18.15 Bcf/d in 2008], resulting in a 1.9% decrease in total annual consumption of natural gas" to 62.32 Bcf/d this year from 63.53 Bcf/d in 2008.

"The projected increase in natural gas use in the electric power sector offsets some of this decline. Lower related natural gas prices compared with coal, particularly in the Southeast, are expected to induce higher utilitization of natural gas-fired electric generation capacity in the near term and lead to a consumption increase of 2.1% [to 18.58 Bcf/d this year from 18.20 Bcf/d in 2008] in the electric power [sector]," the agency said.

At the start of May working gas in storage was 1,918 Bcf, 362 Bcf above the five-year average and 491 Bcf above the level during the corresponding week a year ago. Working gas inventory is projected to peak at about 3,635 Bcf at the end of October this year, exceeding the previous record of 3,565 Bcf reported for the end of October 2007, the EIA said.

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