Fourth quarter gas production could be lower than market suggests

By the OGJ Online Staff

HOUSTON, Dec. 18 -- Fourth quarter estimates of natural gas production could be overly optimistic, lending support to US gas prices next year, even if demand doesn't rebound quickly, financial analysts said Monday.

Raymond James & Associates Inc. projected fourth quarter production could be down as much as 2%, compared to the third quarter. The current market suggest expectations of about a 1.5% decline, analysts said.

Raymond James pointed to the quick decline in drilling, voluntary curtailments due to low gas prices in October, mandatory production curtailments by the pipelines, and yearend tie-in delays associated with tax payments as reasons for another decline in production.

Producers, especially independent oil and gas operators, have become more sensitive to short-term commodity price cycles. When prices fall, the independents are the first to scale back activity. Integrated companies that target larger projects are not as sensitive to short-term price swings, noted Raymond James.

Meanwhile, pipeline companies are forcing producers to limit production because of high pressure in the transportation and storage system.

Raymond James said its forecast is also supported by a similar situation in the third quarter. With production already declining in the third quarter, the analysts said it is "highly unlikely" that producers would be able to increase volume in the fourth quarter after such a steep decline in third quarter activity.

Integrated producers overestimated third quarter production by about 1.8%.

The US Energy Information Administration said low current prices would discourage suppliers from withdrawing gas from storage to sell at a loss when relatively cheap gas is available on the spot market. Despite a warm fall, the government agency said suppliers continue to expect a colder-than-normal winter to cause increasing prices in January.

EIA said the Henry Hub spot price declined through most of the week, but closed at $2.41/MMBtu Dec. 14, up 30¢ over the previous Friday. The price of the futures contract for January delivery at the Henry Hub settled at $2.85/MMBtu, up nearly 28¢ over the previous Friday's price. The futures price for gas for all months in 2002 presently tops $2.50/MMBtu.

At 22 bcf, withdrawals from storage were again small relative to historical averages, EIA said. The agency said the pattern of relatively small net withdrawals from storage likely will continue as the basis differential between the spot price and the near-month futures contract price continues to be positive and relatively significant.

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