The Energy Information Administration (EIA), in its Short-Term Energy Outlook for June, again raised its projection for the average spot price of natural gas this year — by 7% to an average of $6.20/Mcf from the $5.80/Mcf that it had projected last month.

“Even though inventories of natural gas appear normal, strong demand for natural gas, coupled with high petroleum prices, has lifted the ceiling for natural gas prices considerably,” the Department of Energy (DOE) agency said in the outlook report issued last Tuesday.

“Natural gas spot prices (composites for producing area hubs) are likely to average about $6.20/Mcf in 2004, an increase of about 13% from 2003,” the EIA noted. Spot prices started out averaging about $5.50/Mcf in the first quarter of this year, but they have been above $6 since the beginning of May, it said.

The EIA increased slightly its projection for gas demand growth this year. It now estimates demand will rise by about 1.4% to 22.22 Tcf in 2004 from 21.92 Tcf last year “due to increasing economic growth, the lack of fuel-switching options given the high cost of oil, the continuing rise in electricity demand, and below-average hydroelectric power levels in the Pacific Northwest.”

Gas demand is expected to increase only minimally (0.2%) in 2005 as some of the current pressure on natural gas in the electric power sector eases along with spot coal and oil prices, the EIA said.

On the supply side, the EIA now estimates that domestic gas production rose by approximately 0.6% last year, and will increase by about 0.9% in 2004 as new gas well completions, which totaled an estimated 20,000 in 2003, remain high at 24,000 wells per year for the next two years.

But “because of apparently high decline rates from existing wells, these high drilling rates are not expected to yield more than modest net gains in U.S. production,” the DOE agency said. “Therefore, as demand continues to grow, continued supply tightness is likely to keep prices near $6 per thousand cubic feet.”

Net injections of gas into storage during May totaled 374 Bcf, more than the previous five-year May average of 346 Bcf, the EIA noted. Inventory levels at the end of May were 23% higher than last year at this time, it said. “We expect natural gas inventories to track near-normal levels through the forecast as long as weather conditions remain close to normal.”

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