The Energy Information Administration (EIA) in its Short-Term Energy Outlook for June predicts that natural gas consumption for the year will rise 4%, while overall domestic production will be nearly flat.

"Natural gas consumption during the first quarter 2007 was 10% higher than during the first quarter 2006, which was significantly warmer than normal. Demand this summer is projected to be close to what it was last summer, which was also much warmer than normal, leading to an annual average increase in natural gas consumption of 4% in 2007 over 2006," the EIA said in its latest energy outlook, which was released Tuesday.

The Department of Energy agency projects that gas demand will rise to 22.7 Tcf this year from 21.83 Tcf in 2006. The EIA revised its demand projection upward from its forecast in May, when it predicted that annual demand would increase by 3.4% to 22.63 Tcf this year.

On the supply front, the EIA said it expects dry natural gas production from the Gulf of Mexico to decline by 7.4% this year, but to recover in 2008 to 3.1% growth with the aid of the Independence Hub, which is projected to start later this year and produce 1 Bcf/d by mid-2008. "Onshore production increases are expected to offset the drop in Gulf of Mexico supplies for 2007, leaving total dry gas production flat for the year," the agency noted.

The EIA projects that total dry gas production will be 18.51 Tcf this year -- equal to the 2006 production level. It sees natural gas production rising to 18.78 Tcf in 2008.

"EIA's projection of 2007 U.S. natural gas production...includes a hurricane-induced outage of 86 Bcf for the Gulf of Mexico. The total outage is spread across five months (June through October), with the shares distributed by the average historical outage for each month (June 1.1%, July 5.3%, August 33.3%, September 46% and October 14.5%)," the agency said.

The EIA sees Henry Hub spot prices inching upwards as a result of the gas supply-demand imbalance. Spot prices averaged $7.88/Mcf in May, up from $7.83/Mcf in April and $7.32/Mcf in March. After August, the average spot price is expected to climb toward a winter peak of about $9.45/Mcf in January 2008, the agency said. The Henry Hub spot price is projected to average $7.96/Mcf for the year and $8.15/Mcf in 2008.

Augmenting the flat domestic production will be increased imports of liquefied natural gas (LNG), according to the EIA. It projects that LNG imports will reach 790 Bcf this year, 36% above last year's level. However, pipeline imports, mostly from Canada, are expected to decline by 4.4%, or 160 Bcf, this year, as rig activity and production in Canada continue to dip, it said.

For the week ended June 1, working natural gas in storage was 2,163 Bcf, the EIA reported. "While inventories are 366 Bcf above the five-year average, injections during the month of May lowered the deficit to year-ago stocks from 255 Bcf at the end of April to 146 Bcf as of June 1," the agency noted.

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