The Energy Information Administration (EIA), in its October 2006 Short-Term Energy and Winter Fuels Outlook (STEWFO), provided encouraging news for residential natural gas consumers. The current environment of declining prices is compared to last year, as well as near-term future projections that continue to show a tight market and high prices. Electric power generators consume large quantities, and pay the lowest per unit price. The primary use of natural gas by residential consumers, home heating, tends to be quite price inelastic; consequently, the onset of cold temperatures causes demand peaks largely independent of the level of prices. Market Conditions 2006

		Consumption

Aggregate consumption of natural gas in the United States for the first seven months of 2006 was 4.1%, or 551 billion cubic feet (bcf), lower than the comparable period in 2005. Consumption by electric power generators is a derived demand in the sense that their demand for natural gas is dependent on, and derived from, consumers' demand for electric power, which has been growing. Although these two factors affect all market segments, their relative effects vary across the market segments. As a result of this inability to remain competitive in the face of increased natural gas prices in the United States, some firms have either ceased domestic production, or moved their facilities overseas, accounting for the decrease in U.S. industrial natural gas consumption. As such, this sector's consumption might be expected to be relatively insensitive to the price of natural gas as well as weather conditions. Residential prices continued to increase in June and July 2006, even as wellhead prices were beginning to moderate. Risk Factors

Analyses in this report are consistent with the EIA base case in the STEWFO, that consumers might expect to see lower natural gas prices and heating costs during the winter 2006-2007 heating season. However, the EIA's projection is dependent on conditions which may, or may not, materialize. By September 2006, the price had declined to $63.80 per barrel, a decline of over 14%. This decline in oil prices likely contributed to the declining prices in the natural gas market. The market fundamentals of consumption, production and storage reserves are likely to be consistent with a weakening market price. Because the natural gas price has been so volatile in recent years there is a chance that the STEWFO has over or underestimated the natural gas price for the winter heating season.
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.