The Henry Hub spot price averaged $4.09/MMBtu in February, 40 cents below the average spot price in January, and it is likely to average $4.10/MMBtu in 2011, a decrease of 29 cents from the 2010 average, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for March.

The forecast 2011 Henry Hub spot price average is 6 cents lower than EIA predicted just last month (see Daily GPI, Feb. 9). But increasing consumption in 2012, led by strong growth in the electric power sector, will contribute to higher prices and an economic incentive for producers to resume drilling, EIA said.

Total marketed natural gas production grew strongly throughout 2010 (4.4% increasing to 63.8 Bcf/d in December 2010 from 59.7 Bcf/d in January 2010), but year-over-year growth in 2011 is expected to slow considerably to just 0.8% as an increase of 1 Bcf/d in the Lower 48 states onshore is partially offset by a decline of 0.5 Bcf/d in the Gulf of Mexico.

The latest EIA data for monthly gas production showed an increase in Lower 48 production for December 2010, continuing an increase from November. But “modest declines” are expected through this year due to a falling gas-directed drilling rig count in response to lower prices.

“The number of rigs drilling for natural gas as reported by Baker Hughes Inc. increased from a low of 665 in July 2009 to 973 in April 2010. The natural gas rig count stayed relatively unchanged from April through October 2010,” EIA said. “However, since October 2010 the rig count has fallen, dropping to 906 rigs as of Feb. 25. The large price difference between petroleum liquids and natural gas on an energy-equivalent basis contributes to an expected shift towards drilling for liquids rather than for dry gas.”

EIA expects total gas consumption this year to remain close to 2010 levels. Residential and commercial consumption is forecast to be lower than 2010 levels by 1.2% and 2.7%, respectively (reflecting EIA’s methodology for collecting and reporting consumption data that was implemented in mid-2010), while industrial consumption is expected to reach 18.8 Bcf/d in 2011, an increase of 3.9% compared with 18.1 Bcf/d in 2010. Total consumption is forecast to grow 1% in 2012, with a 2.8% increase in the electric power sector and a 1.5% increase in the industrial sector offsetting further declines in residential and commercial consumption.

Pipeline imports are expected to fall 5.6% to 8.4 Bcf/d this year and by 2.3% to 8.2 Bcf/d in 2012, EIA said. Projected imports of liquefied natural gas (LNG) are expected to average 1.2 Bcf/d this year, a 3% drop from 2010, and remain relatively flat in 2012, EIA said. “High domestic production combined with high inventories and low U.S. prices relative to European and Asian markets should continue to discourage LNG imports.”

On Feb. 25 working gas in storage was 1,745 Bcf, slightly below last year’s level at this time. At the end of the winter heating season in March the agency said it expects about 1,549 Bcf will remain in storage, which is a downward revision of about 102 Bcf from the February outlook. Cold temperatures and production freeze-offs in February contributed to a larger-than-expected draw on inventories, EIA said.

While inventories are somewhat below 2010 levels for the first half of the year, they are expected to remain “relatively robust,” EIA said. Slower growth in production and greater consumption will contribute to lower inventories in the second half of 2012, it said.

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