Citing bulging natural gas inventory levels and lower consumption, the Energy Information Administration (EIA) again revised downward its Henry Hub spot price forecast for the year in its Short-Term Energy Outlook to about $7.61/Mcf from the $7.74/Mcf that was projected last month, and ratcheted down its average price forecast for 2007 to $8.13/Mcf from its June prediction of $8.81/Mcf.

“Spot Henry Hub natural gas prices, which averaged $8.86/Mcf in 2005, are expected to average under $7/Mcf over the next few months. Thus, barring extreme weather for the rest of the year, we expect a decline in the annual Henry Hub spot price to about $7.61/Mcf for 2006,” the EIA said in its July energy outlook, which was released Tuesday.

“However, the respite is expected to be short-lived, as concerns about potential future supply tightness and continuing pressure from high oil market prices could drive spot natural gas prices to just over $9/Mcf this coming December and January. The Henry Hub price is expected to average $8.13/Mcf in 2007,” according to the statistical arm of the Department of Energy (DOE).

Due to the absence of cold weather this past winter and lack of a prolonged heat wave so far this summer, the EIA also revised downward its projection for 2006 gas demand. It now sees gas consumption falling to 21.57 Tcf this year instead of the 21.74 Tcf that it predicted in June, and then increasing by 4.2% to 22.48 Tcf in 2007. Specifically, residential gas demand is expected to slide 7.4% to 4.48 Tcf this year and commercial demand will see a dip, while industrial consumption is likely to climb to 7.76 Tcf this year from 7.66 Tcf in 2005, the agency said. Gas demand by electric generation is projected to increase slightly to 5.85 Tcf this year.

At the end of June, working gas in storage stood at an estimated 2,615 Bcf, 425 Bcf above the year-ago level and 591 Bcf above the previous five-year average, according to the EIA. “The relatively warm winter weather and the large difference by which prices for future delivery contracts for the 2006-2007 winter months exceeded spot prices account for much of the current high storage level,” the agency said.

The EIA further predicts that U.S. dry gas production will increase to 18.36 Tcf this year from 18.24 Tcf in 2005, and then rise again in 2007 to 18.56 Tcf. In 2006, the agency expects federal Gulf of Mexico production to rise slightly to 3.19 Tcf, Lower 48 production to fall to 14.72 Tcf, pipeline imports to drop to 3.35 Tcf and liquefied natural gas imports to rise to 0.76 Tcf.

Total new gas supply (excluding storage withdrawals) will fall to 21.74 Tcf this year from 21.91 Tcf in 2005, but it is projected to rebound to 22.32 Tcf in 2007, the EIA said.

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