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EIA Sees Tighter Market, Higher Prices in 2012

The Henry Hub spot price for natural gas will average $4.26/MMBtu over the second half of the year as the working gas inventory deficit relative to last year narrows, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for July. It expects the spot price to climb next year as the market tightens.

As of July 1, working natural gas in storage stood at 2,527 Bcf, 214 Bcf below last year's level for the same period, the EIA said in the outlook, which was released Tuesday. However, "EIA expects that inventories, though currently lower than last year, will come close to last year's levels towards the end of the 2011 injection season." It sees inventories surpassing 3.8 Tcf by the end of October because of current high production rates and a milder summer relative to last year.

While the EIA projects that the spot gas price will average $4.26/MMBtu this year, it expects that the average price will rise 6% to $4.54/MMBtu in 2012 "as slowing growth in production contributes to tighter domestic natural gas markets" next year.

The EIA sees marketed natural gas production expanding by 5.8% to 65.4 Bcf/d this year from nearly 62 Bcf/d in 2010. "Much of this growth [was] expected to occur during the first three quarters of the year, with a more moderate increase in the fourth quarter. Production growth is forecast to continue at a much slower pace in 2012, increasing 0.6 Bcf/d (0.9%) to average 66 Bcf/d," the agency said.

As production heads for a slowdown next year, natural gas consumption -- which is slated to rise 2% to 67.4 Bcf/d this year due to heavy industrial and power generation demand -- also will see a slight decline in 2012. Projected total consumption is expected to drop slightly to 67.3 Bcf/d in 2012, due partly to a decline in residential and commercial gas demand brought on by a decrease in heating degree days in the Midwest and West.

The nation's increased development of shale gas "has reduced reliance on natural gas imports and contributed to increased exports," the EIA said. The agency expects that pipeline gross imports of natural gas will fall by 3.9% to 8.7 Bcf/d this year and by 4% to 8.4 Bcf/d in 2012, while pipeline gross exports to Mexico and Canada are likely to average 4.2 Bcf/d this year and 4.3 Bcf/d in 2012, respectively, compared to 3.1 Bcf/d in 2010.

The import market for liquefied natural gas (LNG) in the U.S. has gone from bad to worse. The EIA projects that U.S. LNG imports will fall from an average of 1.2 Bcf/d in 2010 to 1 Bcf/d this year and next. "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," it said.

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