Propelled by slack production and growing demand from the power generation market, Energy and Environmental Analysis Inc. (EEA) last week said it sees natural gas prices at the Henry Hub averaging near $6.20/MMBtu for the year, and believes there is a good possibility that prices will reach a “sustained” level of $7/MMBtu in 2005.

Other consultants, however, predict that prices will fall in the third and fourth quarters of this year unless there are warmer than normal summer temperatures and the crude oil markets continue to respond to supply scares (see related story).

“We expect Henry Hub prices for the remainder of the current injection season, June 2004 [through] October 2004, to average approximately $6.50 per MMBtu,” EEA said, but it added that “any type of hot summer could easily push gas prices to around $7 per MMBtu.” And, “We expect Henry Hub prices to average $6.80 per MMBtu for the next heating season,” with the average price for the year being $6.20/MMBtu, said the Arlington, VA-based energy consulting firm.

This is consistent with Nymex’s projection of an average price of $6.49/MMBtu for this year’s injection season, but it is below Nymex’s forecast for the peak winter months by nearly 20 cents/MMBtu higher ($6.98).

EEA projects an average of $7.13/MMBtu for 2005 natural gas prices, up considerably from the $6.29/MMBtu average of current Nymex gas futures contracts.

“Continued growth in natural gas demand will create a tighter market balance and thus a trend towards higher prices. The residential and commercial sectors will grow, albeit slowly, along with the economy and population. Even with relatively higher natural gas prices, gas consumption in the power generation sector should still increase. Supply trends will have difficulty keeping up with increased demand,” EEA said in its “Monthly Gas Update” for May, which was released last Thursday.

EEA projects that gas-fired generation will use 13.2 Bcf/d of the gas consumed in the power generation sector this year, an increase of more than 10% over 2003. It expects this to continue into 2005, with gas demand growing to 14.1 Bcf/d.

“Is the gas market driving toward sustained $7 per MMBtu prices in 2005? The answer is a definite maybe… We could easily see a sustained $7 per MMBtu gas price in 2005,” the EEA report noted.

“Our analysis indicates that 2005 average annual prices could vary between $4.50 and $10.50 per MMBtu. However, there is a 75% probability that prices will vary between $6 and $8.50 per MMBtu,” it said.

“The natural gas market is currently in the very tight portion of the supply curve. Production is operating at virtually 100% of productive capacity. There is no option to increase production significantly at any price in the short-run. More gas from storage can and will be withdrawn as prices increase but the supply is limited,” according to EEA.

However, “stealing” gas from storage is “only a temporary solution to the U.S. balance problem,” it said. “Both in 2004 and 2005, we forecast that the U.S. will have a net additional 0.5 Bcf/d of natural gas supply by reducing gas in storage.” But this use of storage to bridge the supply-demand gap could put the nation in a precarious position at the start of 2005, EEA believes.

“By the start of the injection season in 2005, we could see storage levels similar to those of 2003 when Henry Hub prices were trading in double digits,” the energy consulting firm said.

As for the overall storage situation, EEA said there was a slow start to the injection season this year, with current injection levels at about 2 Bcf/d below the levels this time in 2003. At the end of the 2003-2004 heating season, there was 1,034 Bcf/d of working gas in storage. It expects storage injections between the end of March and the start of next heating season in November to total 2,047 Bcf.

U.S. production is “running in place,” EEA noted. “From a low of 750 in 2002, there are now over 1,100 active rigs in the U.S. However, all of this activity hasn’t led to large increases in gas production and additional drilling activity is limited in the short run by the number of rigs and crews available. From 2002 to 2003, domestic productive capacity clearly declined by over 1 Bcf/d. The decline appears to have stopped in 2004 but hasn’t shown a dramatic turnaround. Domestic production in 2005 should be similar to 2004 with only a very, very modest increase at best.”

It estimated that gas production this year will be 51.7 Bcf/d, and will be augmented by 9.2 Bcf/d in net imports and 0.5 Bcf/d from storage, for 61.4 Bcf/d in total supply. In 2005, EEA sees this rising to 62.2 Bcf/d.

And the United States shouldn’t expect to look to Canada for much help. “Canada’s gas market conditions are similar to the U.S., with declining local production and increasing demand,” EEA said.

EEA doesn’t see liquefied natural gas (LNG) imports making a noticeable impact on U.S. energy markets until 2005. “LNG imports in 2005 should be greater than 2004. We estimate an incremental 1.1 Bcf/d for 2005 putting downward pressure on natural gas prices,” the consulting firm said.

“U.S. imports took a small dip at the end of 2003, mostly at Lake Charles [LA], after the accident and fire in Algeria. There [also] appears to be a liquefaction constraint in the Atlantic in general. Natural gas volumes available for import will rise as additional liquefaction capacity is built, but other non-U.S. markets will also compete for those supplies. The question is, can increased LNG imports balance out all of the other components of the natural gas [equation] that are putting upward pressure on gas prices.”

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