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Analysts divided on gas price outlook

Sam Fletcher
Senior Writer

Financial analysts differ over whether natural gas prices are going up or coming down and how the market may react to them.

"High natural gas prices—double what they were a year ago and six times the price of 7 years ago—have taken a significant toll on the US industrial sector," said Ronald J. Barone, a managing director of equity research with UBS Securities LLC, New York, in a Nov. 18 report. "Soaring energy costs have become the largest expense for many companies, forcing them to take drastic measures to stay in business such as shutting down plants, rotating employees, or laying them off permanently."

He cited Dow Chemical Co., which "laid off 7,000 of its 25,000 US employees in the last 5 years as the price of natural gas over that period climbed from $4/MMbtu to more than $14/MMbtu in October." In mid-October, UBS increased its average composite spot natural gas price forecast to $8.60/MMbtu from $8/MMbtu in 2005, $9.50/MMbtu from $8/MMbtu in 2006, and $9/MMbtu from $7.75/MMbtu in 2007 because of the hurricane damage to Gulf of Mexico infrastructure and production.

'Softening' market
But in a Nov. 14 report, Adam Sieminski of Deutsche Bank AG, New York, said: "Analyst forecasts for 2006 may have peaked for the time being. With the softening of US natural gas prices from the hurricane-induced twin peaks in October, we expect to see some let-up in the climb that gas price forecasts have posted recently. [On the New York Mercantile Exchange,] front-month gas prices started the year close to $6/MMbtu and still averaged only about $7.50/MMbtu in July. The rise since then appears to have convinced most analysts that higher prices are durable."

The International Energy Agency raised its 25-year natural gas price forecast for US imports to $5.80/MMbtu in 2010, $5.90/MMbtu in 2020, and $6.20/MMbtu in 2030. European import prices are forecast at $5/MMbtu in 2010, $5.20/MMbtu in 2020, and $5.60/MMbtu in 2030. IEA also increased its worldwide gas demand forecast by 75% to almost 464 bcfd in 2030.

Deutsche Bank's estimate for 2006 is $9.75/MMbtu, unchanged since first published in early September. "Gas price forecasts for 2006 started this year close to $5.25/MMbtu and have climbed in parallel with spot prices, especially since July," Sieminski said. "The consensus forecast among the analyst community for the average 2006 US gas price now stands at about $9/MMbtu. The options market suggests only a 30% probability that the December 2006 gas contract will expire under $9/MMbtu."

The American Chemical Council said that for every $1/MMbtu increase in the cost of natural gas, $3.7 billion in costs are added to the chemical industry, the largest US consumer of natural gas, representing 10% of total demand.

Barone said: "To mitigate the effects of high natural gas prices on production costs, manufacturing plants have turned to conservation efforts and higher production efficiency, cutting energy usage per pound of output by 22% in the last year, according to the National Association of Manufacturers. End-users, however, continue to see a rise in their energy costs and expect to be in for a tough time as the winter season shifts into higher gear.

"Industry leaders view the high natural gas price environment and their exorbitant energy costs as a national crisis of highest priority. They have called for increasing the nation's domestic energy supplies in order to rein in commodity prices and their production costs."

However, the US Congress recently dropped provisions from the energy bill that would have allowed drilling for oil and natural gas in the Artic National Wildlife Refuge and eased offshore drilling restrictions in the US Outer Continental Shelf. The ANWR drilling provision would have allowed two federal lease sales by 2010 in a 1.5 million acre coastal stretch of the 19 million acre wildlife refuge in Alaska. The mean estimate of recoverable crude in ANWR is 10.4 billion bbl, and peak production might be 1 million b/d, according to the US Geological Survey.

"The offshore drilling provision, or the Ocean State Options Act (OSOA), would have allowed states to exempt out of a federal ban on drilling in moratoria areas off their coastlines," Barone said. "Other proposed solutions include passing a bill that would open up Lease 181, a 1.5 million-acre tract in the eastern Gulf of Mexico thought to hold 1.25 tcf in natural gas reserves, by redrawing the state boundary between Alabama and Florida. For the moment, Congress is not ready to rock the boat on the issue, but commercial end-users have vowed to keep up the fight."

(Online Nov. 28, 2005; author's e-mail: samf@ogjonline.com)


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