Citing record storage inventory levels and cool weather in certain parts of the country, the Energy Information Administration (EIA) revised downward its Henry Hub spot price forecast for the year in its Short-Term Energy Outlook to $7.74/Mcf from the $8.11/Mcf that was projected last month, and ratcheted down its average price forecast for 2007 to $8.81/Mcf from its May prediction of $8.39/Mcf. But an active hurricane season, as has been predicted for this year, could cause the spot price projections to sharply reverse direction in late summer, the EIA said.

“Spot Henry Hub natural gas prices, which averaged $8.86/Mcf in 2005, are expected to fall to an average of less than $7/Mcf over the next few months (down from an average of $13.44/Mcf in December). Thus, barring extreme weather conditions for the rest of the year, we expect a decline in the annual average Henry Hub spot price to about $7.74/Mcf for 2006,” the statistical arm of the Department of Energy (DOE) said in its Outlook for June, which was issued Tuesday.

But “the respite is expected to be short-lived. Concerns about potential future supply tightness and continuing pressure from high oil market prices will likely drive spot natural gas prices to just over $10/Mcf this coming December and January. The Henry Hub price is expected to average $8.81/Mcf in 2007,” the agency said.

The EIA attributed the anticipated spot price weakness to the record levels of gas in storage. Working gas in storage stood at an estimated 2.243 Tcf at the end of May, 477 Bcf above a year ago and 706 Bcf above the last five-year average.

It believes the direction of spot prices will reverse itself if the National Oceanic and Atmospheric Administration’s (NOAA) forecast for an active hurricane season is borne out. Based on NOAA’s prediction, the EIA estimates that crude oil production losses this season could reach as much as 35 million barrels, and shut-in natural gas production in the Gulf of Mexico could reach 206 Bcf. This is “the best we can predict” at this time, the EIA said. The losses would be on top of the Gulf oil and gas production output that is still shut in because of infrastructure damaged from Hurricanes Katrina and Rita last summer.

The EIA said its projections for Gulf shut-ins could undergo major revisions when NOAA comes out with its updated hurricane outlook in August. If the current hurricane season tracks that of last year, “EIA estimates of shut-in crude oil and natural gas production due to tropical storm activity could be significantly higher,” it noted. And this “could add volatility to near-term prices, particularly in the latter part of the summer,” the agency said.

The EIA sees domestic gas demand falling by 0.2 Tcf to 21.74 Tcf this year, or 0.9%, then increasing by 0.8 Tcf to 22.56 Tcf in 2007. “With weak electric load due to the warm January and weaker expected cooling load this summer compared to 2005, the consumption of natural gas for generation of electricity is to increase only slightly by 0.3% in 2006, then increase by 0.7% in 2007,” the agency said.

“Also, because of an exceptionally warm January this year, residential consumption is projected to fall by 6% from 2005 levels in 2006 and then increase by 7.7% in 2007. Recovery in natural gas-intensive industrial output following the 2005 hurricanes will likely contribute to growth in industrial natural gas consumption this year (2.2%) in 2006 and 950 Bcf in 2007.”

Domestic dry gas production in 2005 declined by 2.7% to 18.24 Tcf largely because of hurricane-induced infrastructure disruptions in the Gulf, the EIA said. Dry gas production is expected to rise 0.7% to 18.38 Tcf this year and by 1.2% to 18.59 Tcf in 2007, according to the DOE agency. Total liquefied natural gas net imports are likely to increase from their 2005 level of 631 Bcf to 710 Bcf this year and 950 Bcf in 2007, the EIA said.

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