Reduced demand for natural gas in the electric generation and residential markets, combined with bulging inventories for this time of the year, are setting the stage for weaker spot gas prices throughout much of the year, according to the Energy Information Administration’s (EIA) Short-Term Energy and Summer Fuels Outlook that was released Tuesday.

“With weak electric heating load due to the warm January and much weaker expected cooling load this summer compared to 2005, the consumption of natural gas for generation of electricity is expected to fall by 2.5% in 2006 [to 5.65 Tcf], then increase by 1.6% in 2007. Also, because of the exceptionally warm January this year, residential consumption is projected to fall by 3.9% [to 4.64 Tcf] from 2005 levels in 2006 and then increase by 4.9% in 2007,” the statistical arm of the Department of Energy (DOE) said in its combined energy outlook for April and this summer. At the same time, the EIA expects gas demand by the hurricane-battered industrial sector to grow by 2.5% to 7.9 Tcf this year and by 3.6% in 2007.

Overall, the agency sees gas demand falling by 0.9% to 21.79 Tcf this year and then climbing by 3.4% to 22.52 Tcf in 2007.

The industry closed out the winter heating season on March 31 with a significant inventory overhang due to the unexpectedly warm weather, especially in January. Working gas in storage at the end of March was estimated at 1,695 Bcf, which was 411 Bcf above the year-ago level and 629 Bcf above the last five-year average.

Due to the high inventory level and moderating gas demand, spot Henry Hub natural gas prices, which averaged $9/Mcf in 2005, are expected to fall to an average of about $7.50/Mcf over the next few months from an average of about $13.44/Mcf last December, according to the EIA. “Thus, barring extreme weather conditions for the rest of the year, 2006 should bring a noticeable easing in spot natural gas prices, leading to an annual average decline in the Henry Hub price of about 10%,” the agency said.

But “the respite is expected to be short-lived. Concerns about potential future supply tightness and continuing pressure from high oil market prices are keeping expected spot natural gas prices for the next heating season at high levels, with the Henry Hub spot price projected to again rise to just under $10/Mcf,” the EIA noted. It sees the Henry Hub spot price staying in the high $7 range through the third quarter, and then climbing to $8.95/Mcf in the fourth quarter and to $9.16/Mcf in the first quarter of 2007. May crude oil futures settled $1.35 higher Monday at $68.74/bbl.

The agency estimated that domestic dry gas production fell 2.8% to 18.22 Tcf in 2005 owing mainly to the hurricane-induced infrastructure disruptions in the Gulf of Mexico last summer. However, overall dry gas production is expected to rise by 1.8% to 18.55 Tcf this year and by 1.1% to 18.75 Tcf in 2007, the EIA said.

Total liquefied natural gas imports are projected to increase from their 2005 level of 630 Bcf to 770 Bcf this year, and reach 970 Bcf in 2007.

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