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Citing Warm Weather, EIA Lowers Ceiling for Winter Spot Prices

Citing unseasonably warm weather and reduced natural gas demand, the Energy Information Administration (EIA) in its Short-Term Energy Outlook for January lowered the ceiling for spot prices this winter to less than $7/Mcf. The agency last month predicted that winter spot prices would stay below the $9/Mcf mark (see Daily GPI, Dec. 13, 2006).

The spot gas price in December averaged $6.97/Mcf. "While the forecast for the remaining winter months is for only slightly warmer-than-normal weather, the average Henry Hub spot price this winter is expected to remain below $7. However, natural gas prices will remain sensitive to any periods of sustained cold weather during the remainder of this winter heating season -- particularly in the major natural gas-consuming regions, such as the Northeast and Midwest," the EIA said in the January energy outlook, which was released Tuesday.

The spot gas price averaged $6.94/Mcf last year, and is expected to average $7.06/Mcf in 2007, compared to the EIA's previous projection of $7.87/Mcf, the agency said. It sees spot prices climbing to $7.72/Mcf in 2008. As a result of the lower gas prices and consumption levels, the EIA estimates heating season expenditures for gas-heated households will fall to $809 from the previously estimated $882.

A factor contributing to the lower gas prices is the high inventory levels. As of Dec. 29, working gas in storage was 3,074 Bcf, 433 Bcf above the year-ago level and 408 above the five-year average for that date. The current high inventory levels are expected to slowly return to the historical average over the forecast period through 2008, the agency noted.

The EIA projects gas demand will grow 2.4% this year to 22.49 Tcf from 21.96 Tcf in 2006, compared with a 1.3% slide in 2006 from 2005. The current weather forecast for colder winter and cooler summer months in 2007 compared with 2006 will drive increases in residential and commercial gas demand for heating and lower gas demand for electricity generation needed to power air conditioners, the agency said.

Industrial gas demand is estimated to have declined by 1.5% in 2006 and is projected to be followed by increases of 1.1% and 1.8% in 2007 and 2008, respectively, according to the EIA. Above-average summer temperatures stimulated a 7.4% hike in gas consumption by the power sector last year. A return to normal weather is likely to leave power sector demand growth relatively unchanged this year, the EIA said.

While total domestic production of dry gas rose 2.4% to 18.51 Tcf last year from 18.07 Tcf in 2005, moderate production growth of 1.9% to 18.87 Tcf is expected for 2007, the EIA said. Net imports of gas are estimated to have fallen 5.5% to 3.42 Tcf in 2006 from 3.61 Tcf in 2005, but are likely to increase by 7.8% to 3.64 Tcf in 2008, it noted.

Declining pipeline imports of gas from Canada will be tempered by rising liquefied natural gas imports, which are expected to increase to 0.8 and 1.1 Tcf per year, respectively, in 2007 and 2008, according to the EIA.

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