Henry Hub spot gas prices should average about $4.84/MMBtu for the rest of the storage injection season but could temporarily “collapse” in October as the market realizes that working gas levels in storage will significantly exceed the traditional 3.2 Tcf “full” level, according to a Monthly Gas Update by Arlington, VA-based consulting firm Energy and Environmental Analysis Inc. (EEA).

Nevertheless, EEA predicts that the tight supply-demand balance will return this winter and will be even tighter next year. Cooler than normal weather this summer, higher than anticipated nuclear generation, lower than expected economic growth and a changing price relationship between residual fuel oil and crude oil all have contributed to less gas demand and higher storage injections, EEA noted.

The consulting firm lowered its price forecast for 2004 to $5.45, but it still expects a sharp $1/MMBtu increase in prices next year to an average of $6.45.

“Continued growth in natural gas demand will create a tighter market balance and a trend toward higher gas prices, ” EEA said. “The residential and commercial sectors will grow, albeit slowly, along with the economy and population. Even with relatively high natural gas prices, gas consumption in the power generation sector should continue to increase. Supply trends will have difficulty keeping up with increased demand.”

EEA expects U.S. gas productive capacity to remain near 2003 levels through 2005 despite higher gas prices. “U.S. domestic production will be hard pressed to reach 2001 levels anytime soon,” EEA said.

Gas demand increases will only be partially met by increasing imports of liquefied natural gas (LNG) and only slight domestic production increases. “Continued gas demand increases will generate additional price pressure beyond 2005 if LNG imports do not significantly increase,” the consulting firm predicted.

EEA expects that LNG imports will increase 0.5 Bcf/d to 1.9 Bcf/d this year and will grow to 2.7 Bcf/d in 2005. But gas imports from Canada are expected to drop 0.2 Bcf/d this year to 11.5 Bcf/d and rise slightly in 2005 to 11.7 Bcf/d. Meanwhile, gas exports to Mexico are expected to reach 1.1 Bcf/d this year up from 1 Bcf/d in 2003 and should grow to 1.4 Bcf/d in 2005.

Domestic dry gas production is expected to end the year flat at 51.4 Bcf/d and grow to only 51.5 Bcf/d in 2005, when total gas demand reaches 62.4 Bcf/d (up from an expected 60.6 Bcf/d in 2004).

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