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Record-high gas inventories in autumn seen curbing price recovery

Slowingproduction and rising demand will likely support natural gas prices through2016 however monthly average prices at Henry Hub are unlikely to top $3/MMBtuin the current calendar year, the U.S. Energy Information Administration saidin its latest monthly "Short-TermEnergy Outlook."

HenryHub natural gas spot prices averaged $1.73/MMBtu in March, a decline of 26cents from the February price, as warmer-than-normal weather through most of the winter,inventory levels remained at recordhighs and production growth all contributed to sustained lownatural gas prices.

Whileprices should recover through the balance of the year, monthly average HenryHub spot prices are forecast to remain below $3.00/MMBtu through December. TheEIA forecasts Henry Hub natural gas prices will average $2.18/MMBtu in 2016, adecrease of 3.0% from last month's outlook, while the agency held its 2017outlook basically unchanged on the month at $3.02/MMBtu.

Workingnatural gas inventories in storage ended the winter withdrawal season at 2,478Bcf, slightly above the previous record high for the end of March set in 2012.The end-of-March inventory level was 67% above the level at the same time lastyear and 53% above the five-year average for that date.

"Thewinter heating season was characterized by warmer-than-normal temperatures,continued high production volumes, and low natural gas prices," the April12 report states. "Looking forward to the summer, EIA projects record-highlevels of consumption of natural gas for power generation."

Lookingahead to the start of next winter, EIA forecasts inventories to be 4,112 Bcf atthe end of October 2016, which would be the highest level on record to beginthe heating season.

TheEIA forecasts U.S. total natural gas consumption will average 76.2 Bcf/d in2016 and 77.6 Bcf/d in 2017, compared with 75.3 Bcf/d in 2015, as increaseddemand in the electric power sector in 2016 is seen driving increases in totalconsumption. Forecast electric power sector use of natural gas is called toincrease by 3.9% in 2016, then declines by 1.3% in 2017, as natural gas pricesrise. Forecast industrial-sector consumption of gas is expected to increase by2.7% in 2016 and by 2.2% in 2017, as new fertilizer and chemical projects comeonline.

Onthe production side, the EIA projects relatively low production growth throughmost of 2016, as low gas prices and decliningrig activity begin to affect production. In January, total marketedproduction averaged 79.0 Bcf/d, upnearly 1% on the month, but most of that increase in productioncame from Pennsylvania and West Virginia, two states with Marcellus production.

"EIAsurvey data have shown some production flatteningon a national level," the agency said.

However,at the end of this year and into 2017, production growth is expected to rise inresponse to increases in price, industrial demand and LNG exports, the reportstates.

TheEIA expects growth in U.S. gas production through 2017 to reduce demand fornatural gas imports from Canada while exports by pipeline to Mexico willincrease because of growing demand from Mexico's electric power sector and flatnatural gas production in Mexico.

TheEIA projects LNG gross exports will increase to an average of 0.5 Bcf/d in2016, with the startupof Cheniere Energy Inc.'sSabine Pass LNG liquefaction plant in Louisiana, which sent out its first cargoin February. EIA projects gross LNG exports will average 1.3 Bcf/d in 2017, asSabine Pass ramps up its capacity.