Spot prices at the Henry Hub could drop below $4/MMBtu near the end of the injection season as many gas storage fields could reach their maximum capacity, Energy and Environmental Analysis Inc. (EEA) said Tuesday, echoing the predictions of some analysts and regulators but contrasting with recent comments from analysts at Raymond James & Associates (see Daily GPI, June 20). However, EEA also said gas prices are likely to “rebound significantly as soon as winter heating load develops.”

“Barring significant hurricane activity in the Gulf of Mexico, it is unlikely that 2006 natural gas prices will average last year’s levels,” the Arlington, VA-based consulting firm said in its Monthly Gas Update. EEA expects Henry Hub spot prices to average near $6.30/MMBtu this year, almost $2.50 less than prices in 2005 ($8.80/MMBtu). June through October prices are projected to average less than $5.50/MMBtu.

Meanwhile, spot Henry Hub cash prices averaged $6.71 on Monday, and July Nymex futures ended Monday at $6.893 and then fell to $6.502 on Tuesday. Based on EEA’s prediction, the market will face significant declines in the near term.

The main factor pressuring prices lower is storage, and EEA projects that working gas levels in storage will end the injection season at a record high of more than 3.6 Tcf. But domestic gas production also weighs in gas market bears’ favor. EEA believes that gas production is on the rise again. The consulting firm said production will grow to nearly 52 Bcf/d by the end of the year in large part because of production increases in Central and East Texas.

“Absent a major hurricane, some producers may even curtail production in September and October if no storage space is available and prices are down near $3.00/MMBtu,” EEA said.

Another bearish contributor in the second half of the year will be rising liquefied natural gas (LNG) imports. LNG is expected to average near 2 Bcf/d for the remainder of the year, which is much higher than in the first half of the year when European imports were relatively high because of warm weather, EEA said.

And lastly, summer gas demand from gas-fired power generation is expected to be lower than last summer, which was 18% warmer than normal. Gas demand from generators is expected to average about 18.1 Bcf/d from June through September, which is about 1 Bcf/d less than during the same period in 2005, according to EEA. “Recent spring power demand was relatively strong, which put some moderate upward pressure on natural gas prices. May 2006 power demand was 2.6 Bcf/d greater than last [May] due to cooling degree days 30% above normal.”

However, this downward turn in the market should be short-lived, according to EEA. “The overall natural gas supply-demand balance remains tight,” the firm said. “Given normal weather, natural gas prices should rise appreciably above 2006 levels. We expect 2007 Henry Hub prices to average approximately $7.65/MMBtu.” The key reasons for this are a return to more normal storage levels of 1.25 Tcf in April and 3.35 Tcf next November, continuing growth in gas-fired power usage (0.9 Bcf/d more than in 2006), and only a modest increase in domestic gas production and LNG imports (500 MMcf/d more LNG than in 2006 and 1.6 Bcf/d more production).

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