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Natural Gas Markets in 2006

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Publication Date: December 2006

Publisher(s): Library of Congress. Congressional Research Service

Series: RL33714

Topic: Energy (Natural gas industry)

Abstract:

The Energy Information Administration (EIA) in its Short Term Energy and Winter Fuels Outlook (STEWFO) provided good news for residential natural gas consumers. EIA projected that natural gas winter home heating costs might decline by as much as 13% from last year's record-setting levels, even though consumption is expected to increase this winter. The STEWFO sees prices for natural gas lower than last year as a result of weak market fundamentals.

Analyses of natural gas market demand and supply conditions seem to be consistent with the EIA STEWFO. Aggregate consumption of natural gas over the first seven months of 2006 has declined compared to 2005. U.S. production, as well as imports, have also declined over the same time period, likely in response to the decrease in consumption. On a sectoral level, the decline in consumption has included all consumer groups except electric power generators, whose consumption rose. Storage of natural gas, the factor that balances yearly demand and supply, is at an all time record high level, and is approaching the maximum physical capacity of the system. There does not appear to be any fundamental imbalance between demand and supply in the 2006 natural gas market, making a stable, or even declining, price level likely.

The price of natural gas is actually many prices. Small, residential, consumers typically pay the highest prices per unit of natural gas, and large industrial and electric power consumers pay the lowest prices per unit. Taken in this context, the 2006 price outlook may be less favorable than the EIA suggests, across different sectors. Residential prices had not responded to falling wellhead prices as of July 2006. The past several years of high gas prices have yielded a 14% decline in industrial consumption, and that demand may not return to the market.

Risk factors, including weather conditions, movements in the price of crude oil, and developments in the futures markets all could affect the market balance in the natural gas market. Because these factors have caused price volatility in the past, the EIA outlook may best be considered as conditional on outcomes in these areas.

This report will be updated.