The Energy Information Administration (EIA) expects that higher projected natural gas production during the first half of the year compared with the same period last year, combined with declining consumption, will result in moderate gas spot prices, the agency said in its Short-Term Energy Outlook for January.

The EIA projects that natural gas production will average 59.13 Bcf/d during the first half of the year compared to 58.24 Bcf/d for the same period in 2010, while consumption falls slightly to 67.77 Bcf/d for the first half compared to 68.85 Bcf/d for the same period last year.

Due to the forecast of higher production and lower consumption in the first six months, the EIA said it expects moderating natural gas spot prices. The EIA sees the projected spot price falling to a low of $3.73/MMBtu in June and then rising to $4.81 in December, averaging $4.02/MMBtu for the entire year. This would be 37 cents/MMBtu lower than the 2010 average. The agency expects spot prices to rise to an average of $4.50/MMBtu in 2012.

For the entire year, the EIA expects gas production to fall to 58.63 Bcf/d from 58.87 Bcf/d in 2010. This production decline and a projected increase in gas consumption in 2012 will contribute to a strengthening of natural gas prices late in this year and next. As gas prices begin to rise, forecast production rebounds in 2012 by 2.2% to 59.91 Bcf/d, the agency said.

The EIA sees gas demand declining by 0.9% to 65.42 Bcf/d this year from 65.99 Bcf/d in 2010. Projected residential and commercial consumption is expected to fall by about 2.7% this year because of a forecast of 1.3% fewer heating degree days during the winter months compared with last year, and due to changes in the way that the agency collects and reports gas consumption.

Projected gas consumption in the power sector is likely to fall by 1% in 2011 because of an expected return to near-normal summer weather, while gas demand by the industrial sector is poised to climb by 1.1% this year.

At the start of this year natural gas inventories stood at 3,097 Bcf, slightly below last year's level at the same time. The EIA expects about 1,774 Bcf of working gas will be in storage at the end of March, which would be a record high and well above last year's level of 1,662 Bcf, the agency said. It noted that it sees record high inventories continuing through most of the year, with falling production to bring inventories back into their historical range in 2012.

The EIA estimates that gross pipeline imports will hit 8.6 Bcf/d this year and 8.2 Bcf/d in 2012, year-over-year decreases of 4.3% and 4.4%, respectively. Canadian gas will become less competitive as new U.S. pipelines and increased Lower 48 production with lower transport costs displace imports, the agency said.

Liquefied natural gas (LNG) levels are likely to fall by 4.7% to average 1.1 Bcf/d this year. LNG imports in 2012 may grow modestly to 1.2 Bcf/d, according to EIA. High domestic production, high inventories and low U.S. gas prices relative to European and Asian markets should continue to discourage LNG imports into North America.

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