The cost of crude oil and gasoline may be soaring, but natural gas prices continue to lag, with Henry Hub spot prices forecast to average $3.17/MMBtu this year, an 83-cent decline from last year’s average spot price, according to the Energy Information Administration’s (EIA) Short-Term Energy Outlook for March. The 2012 price forecast is 11 cents lower than last month’s outlook (see NGI, Feb. 13).

While the market has been decidedly bearish — Henry Hub spot prices averaged $2.50/MMBtu in February, the lowest average monthly price since February 2002 — EIA expects some improvement next year, with Henry Hub spot prices forecast to average $3.96/MMBtu in 2013.

“Abundant storage levels, as well as ample production, have contributed to the recent low prices,” EIA said.

EIA said natural gas futures prices — for May 2012 delivery (in the five-day period ending March 1, 2012) — averaged $2.69/MMBtu, with an average implied volatility (IV) rating of 42%, compared to a 33% IV rating from May 2011. The lower and upper bounds for the 95% confidence interval for May 2012 contracts are $1.96/MMBtu and $3.69/MMBtu, respectively, compared to $3.09/MMBtu and $5.11/MMBtu from last May.

Working gas inventories continue to set new seasonal record highs due to unusually warm winter, with a total of 2,513 Bcf in storage at the end of February, 756 Bcf greater than last year’s level. EIA expects the heating season to end with inventories of more than 2,270 Bcf at the end of this month. That would be the highest end-of-March level on record, according to the agency.

Help for the gas glut may come from the electricity generation sector. EIA said it expects generation from natural gas to increase by about 9% this year, while generation from coal is expected to decline by nearly 5%. A subsequent decline in coal prices could help coal regain some of its power sector generation share in 2013, according to EIA.

Bentek Energy LLC has said it expects more gas-fired power generating capacity will act as a sponge that would soak up some of the market’s excess natural gas. “Some 12.5 GW [gigawatts] of gas-fired electric power generation is under construction with in-service dates ranging from between May 1, 2012 and Dec. 31, 2013,” the Evergreen, CO-based analytics firm said in a recent note. “This new gas-fired capacity equals gas demand estimated by Bentek at more than 1.1 Bcf/d.”

Due in large part to prolific shale gas development, total marketed gas production in the United States experienced its largest year-over-year volumetric increase in history in 2011, rising by an estimated 4.8 Bcf/d, or 7.8%, to 66.15 Bcf/d last year from 61.38 Bcf/d in 2010. “While EIA expects year-over-year production growth to continue in 2012 and 2013, the projected increases occur at a much lower rate than in 2011 as low prices reduce new drilling plans,” according to the outlook.

The Baker Hughes rig count fell to 691 as of March 2 from a 2011 high of 936 in mid-October.

“So far, the lower rig count has not impacted production levels, partly reflecting improved drilling efficiency,” EIA said. “However, fewer horizontal natural gas wells, particularly in areas such as the Haynesville Shale, contribute to small short-term production declines through June 2012. These declines reverse later in the year as prices rise, wet natural gas production rises, and associated gas production from oil wells increases.”

In a separate report issued Thursday, EIA said U.S. household expenditures for natural gas this winter are on track to be the lowest in nine years, while consumption is poised to finish the 2011-2012 heating season at a 10-year low. The average household is expected to have paid about $629 to heat its home with natural gas this winter season, down 13% from last winter and the lowest projected gas heating expense since $599 for the 2002-2003 winter.

The low gas expenditures for households come as no surprise, given that the country has endured one of the warmest winters in years and entered the heating season with the gas futures price at the lowest level since 2001-2002. The number of heating degree days from October through February was down 11% compared to the 30-year average, according to the EIA.

“Mild weather [has been] the big driver of lower natural gas expenditures this winter for households,” the EIA said. It estimates that a household that heats with gas will have consumed an average of about 62.3 Mcf this winter, which is down 10% from last year’s level (70 Mcf) and the lowest estimated household winter gas heating use in more than 10 years.

In October, in its Winter Fuels Outlook for 2011-2012, EIA originally projected that an average household heating with gas would spend $19 (3%) more this winter than the average of $700 that it spent last winter (see NGI, Oct. 17, 2011). About one-half of U.S. households use gas as their primary heating fuel.

But when the price for physical gas traded at Henry Hub cratered and stayed below the $3 level in mid-January, EIA scaled back its projections for household heating expenditures, not only for natural gas but for heating oil, propane and electricity (see NGI, Jan. 16). In fact, it said this marks the first winter in a decade that household expenditures are expected to be less for all major heating fuels than in the prior year.

EIA expects pipeline gross imports to fall by 0.6 Bcf/d (7%) in 2012 as domestic supply displaces Canadian sources. The relatively warm winter will also add to the year-over-year decline in imports, particularly to the Northeast, EIA said. And liquefied natural gas imports are expected to fall by 0.3 Bcf/d (28%) in 2012.

EIA said it expects the price of West Texas Intermediate crude oil to average about $106/bbl in 2012 and 2013, $11/bbl higher than the average price last year. Prices for regular grade gasoline at the pump are expected to average $3.79/gal in 2012 and $3.72/gal in 2013, compared with $3.53/gal last year, EIA said.

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