April 10, 2012 / 5:11 PM / 8 years ago

UPDATE 2-U.S. gov't boosts 2012 natgas production estimate

* EIA revises up production growth to 4.5 pct

* Demand growth lags despite fuel switching, up 4.3 pct

* Sees 2013 supply flat after seven straight yearly gains (Rewrites with hopes dashed of glut easing; adds quote, gas prices, background)

By Joseph Silha

NEW YORK, April 10 (Reuters) - The U.S. government sharply raised its estimate for domestic natural gas production this year for a third month in a row, dashing bullish hopes that deep cuts in drilling might be starting to temper a supply glut.

While the Energy Information Administration projected greater gas consumption for the year, primarily due to switching by utilities to gas from pricier coal, it was not expected to be enough to bring the market back in balance, raising the odds for a storage crisis this fall.

“EIA raised production more than demand, which is going to make people hesitate about getting long (buying) futures. Cash (physical prices) are still drifting lower, which means there’s just too much gas around,” said Steve Mosley at SMC Advisory Services in Arkansas.

But as prices languish at a decade low of nearly $2 per million British thermal units (mmBtu), the EIA suggested the market could begin to tighten next year. It forecast production at near flat after seven straight yearly gains, while consumption was expected to grow by about 1.4 percent.

In its April Short-Term Energy Outlook, EIA said it expected marketed natural gas production in 2012 to rise by 3 billion cubic feet per day, or 4.5 percent, to a record 69.22 bcfd, up from its March outlook that had output this year at 67.91 bcfd.

The expected gains in marketed output follow a 4.8 bcfd, or 7.9 percent, increase in 2011 to 66.22 bcfd, the largest year-over-year increase in history and easily eclipsing the previous record of 62.05 bcfd in 1973.

Natural gas consumption this year is expected to rise 2.84 bcfd, or 4.3 percent from 2011, to 69.60 bcf daily. EIA said large gains in electric power use will offset declines in residential and commercial demand.

The steady rise to record production, primarily due to increased supplies from shale, has lessened the nation’s dependence on Canadian imports, which have dropped from about 15 percent of total supply four years ago to about 11 percent now.

A steep drop in gas drilling - the Baker Hughes gas rig count is down 31 percent since peaking at 936 in October - has raised expectations that historically low gas prices might finally force producers to slow output, but EIA noted the decline has not yet had an impact on production.

Gas futures prices on the New York Mercantile Exchange slid to a new 10-year low of $2.029 on Tuesday.

The largest demand increase this year is expected to come from utilities that switch to cheaper gas from pricier coal to generate power.

LNG imports are expected to fall by 0.3 bcfd, or 28 percent, to about 0.7 bcfd in 2012. Imports will likely come in the form of contractual cargoes to the Everett terminal in Boston and the Elba Island terminal in Georgia, the EIA said.

EIA expects Henry Hub natural gas prices NG-W-HH in 2012 to average $2.51 per million British thermal units, down 21 percent from last month’s outlook and about 37 percent below 2011’s estimated average of $4.

In 2013, the EIA sees prices rising 89 cents, or 35 percent, to $3.40 per mmBtu. (Additional reporting by Edward McAllister; editing by Alden Bentley and Andre Grenon)

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