While February may finally bring some cold weather, according to the latest forecasts, the natural gas futures market is still significantly overvalued, consulting firm Energy and Environmental Analysis Inc. (EEA) said in its latest Monthly Gas Update. EEA expects Henry Hub gas prices to moderate from 2005’s record high average of $8.80 and end this year at only $7.50/MMBtu. The 11-month strip of 2006 futures prices ended the day on Friday at $9.126.

The year got off on a very weak start with temperatures during the first three weeks of January at 29% above normal. EEA estimates gas demand in January will end the month nearly 9 Bcf/d lower than expected with normal weather. That has left gas storage levels 22% higher than the five year average. EEA expects working gas levels in storage to end the heating season at 1.35 Tcf. Storage injections from April through October are expected to average 9.5 Bcf/d, which is only 0.5 Bcf/d higher than in 2005. And working gas levels are projected to reach 3.4 Tcf by the next heating season, higher than the previous two years.

Meanwhile, Gulf of Mexico gas production that was shut in due to damage from the hurricanes is returning at a faster clip. Shut-ins are expected to reach about 600 MMcf/d by summer and slip to 300 MMcf/d by fall.

LNG imports also are expected to increase this year, averaging 1.9 Bcf/d in 2006 compared to 1.7 Bcf/d in 2005, EEA said.

These bearish impacts will be offset by the rise in gas demand from power generation next summer, which is expected to be up about 600 MMcf/d from summer of 2005 to 13.5 Bcf/d in summer 2006. Gas-fired power generation will “limit downward price pressure” this summer, EEA noted. For more from EEA, go to www.eea-inc.com.

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