Natural gas prices are expected to continue rising this year, averaging more than $6/MMBtu this fall and winter, according to the Energy Information Administration’s latest Short Term Energy Outlook. The EIA has done an about-face on its domestic supply projections. It now sees “only marginal improvement in the supply picture” through 2005 with slight domestic production growth next year and modest increases in liquefied natural gas (LNG) imports.

In contrast to prior forecasts, the EIA now expects domestic dry gas production to fall in 2004 to 19.02 Tcf from 19.07 Tcf in 2003. Production is expected to grow to 19.18 Tcf in 2005. Meanwhile, EIA cut its LNG imports projections to 680 Bcf this year and 780 Bcf in 2005 from its prior forecast in July of 690 Bcf in 2004 and 800 Bcf in 2005. Pipeline imports (Canadian supply) is expected to fall 3% this year to 3.32 Tcf and fall another 2.4% in 2005 to 3.24 Tcf.

As a result, natural gas spot prices are expected to remain high. Henry Hub prices averaged $5.80/Mcf in 2003 and are expected to average $6.21 in 2004 and $6.60 in 2005.

However, the agency cut its domestic gas demand forecast for this year to 22.02 Tcf from July’s prediction of 22.18 Tcf. Demand still is expected to increase 0.4% this year and 0.7% next year.

“Recent data indicate that coal use for power generation was stronger than previously estimated during the spring and therefore has likely been higher this summer than suggested in our earlier projections, reducing somewhat the need for natural gas for power generation,” EIA said. “Meanwhile, new data show that natural gas for residential and commercial demand was overestimated in our previous outlook and thus the current projections have been adjusted downward.”

Industrial gas use continues to suffer from high prices. EIA said that an index of industrial output by traditionally gas-intensive industries declined by about 3.6% between 1999 and 2003. Total natural gas use in the industrial sector declined by 13.3% over the same period. Thus, overall gas intensity fell by about 10% over the period.

“A variety of industry adjustments caused this reduction, including fuel switching, conservation and cutbacks in operations in some industries more sensitive to gas costs than others,” the agency said. “It is expected that similar adjustments will continue in the future and that industrial natural gas intensity will continue to decline. Industrial gas demand is expected to grow by about 0.5% this year and 0.1% in 2005.”

Despite tight supply and demand, the agency said it expects natural gas levels in storage to end the injection season near 3.2 Tcf, “a level that would be considered in the upper end of the normal range.”

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.