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EIA Expects Near-Record Inventories This Year

Despite ending April at 1.8 Tcf -- about an 11% decline compared with April 2010 -- working gas inventories will build strongly this summer and should approach record-high levels in the second half of the year, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for May.

The Henry Hub spot price averaged $4.25/MMBtu in April, 28 cents above the average spot price in March and 25 cents higher than EIA forecast last month (see Daily GPI, April 13), EIA said. The spot price is likely to average $4.24/MMBtu in 2011, a decrease of 15 cents from the 2010 average, according to the outlook. A forecast production decline will contribute to a tightening domestic market next year, helping to push 2012 Henry Hub spot prices to an average $4.65/MMBtu.

The growth in total marketed natural gas production is expected to slow from 2010's 4.5% (2.6 Bcf/d) increase, according to EIA, which projects total marketed production to grow by 2.3% (1.4 Bcf/d) to 63.2 Bcf/d in 2011. Marketed gas production fell by 1.1 Bcf/d in February compared with January, due in large part to temporary factors, including seasonal maintenance in the Gulf of Mexico and colder-than-normal weather that led to gas curtailments in several states (see Daily GPI, Feb. 7).

EIA said it "expects production will recover from February levels but begin modest month-to-month declines that could continue through the year because of reductions in the number of active natural gas drilling rigs. The number of rigs drilling for natural gas, as reported by Baker Hughes Inc., has fallen from 973 in April 2010 to 882 as of April 29, 2011. More rigs are being directed toward oil instead of gas, largely because of the large price disparity between the two fuels on an energy-equivalent basis." As of April 21, the number of active oil-directed rigs exceeded the number of gas-directed rigs for the first time since April 28, 1995, EIA said.

EIA expects total gas consumption this year to increase slightly compared with 2010 levels, reaching 66.5 Bcf/d, primarily because of a forecast 1.9% increase in industrial consumption. Total consumption is forecast to grow 0.7% in 2012, with a 2.6% increase in the electric power sector and a 1.4% increase in the industrial sector offsetting further declines in residential and commercial consumption.

Liquefied natural gas (LNG) imports will average 0.9 Bcf/d this year, a 21% decrease compared with 1.2 Bcf/d in 2010, but increased demand in Japan, already the world's largest LNG importer at more than 9 Bcf/d last year, will drive LNG prices higher, EIA said.

"Because of the earthquake in Japan and subsequent nuclear generation outages, Japan's demand for LNG as a replacement fuel for electric power generation is expected to increase, contributing to higher global LNG prices," EIA said.

On April 29 working gas in storage was 1,757 Bcf, which was 226 Bcf below last year's level at this time. EIA expects that inventories, though somewhat below their 2010 levels for the first half of the year, will remain robust.

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