Gas prices easing with warmer weather-but bull market persists

Jan. 26, 2001
Natural gas prices are finally beginning to moderate a bit with warmer weather, but not before price forecasts for the balance of 2001 were notched up again. So 2001 still looks like a bull market for natural gas, and 2002 looks pretty strong as well.

Natural gas prices are finally beginning to moderate a bit with warmer weather, but not before price forecasts for the balance of 2001 were notched up again. So 2001 still looks like a bull market for natural gas, and 2002 looks pretty strong as well.

Temperatures continued to warm up last week across much of the US, following an upturn in temperatures the week before. The week of Jan. 15 saw heating degree days that were about 3% lower than the same week a year ago. And weather forecasters last week were projecting that temperatures across most of the contiguous US would remain at normal to above-normal levels through early February. Much of the winter to date has seen temperatures at normal to below-normal levels-notably picking up record lows in many places.The upshot is that spot and near-month futures prices for gas have dipped from near-$10/MMbtu levels to $6-7/MMbtu.

The warming respite pulled prices down to a more manageable-if still historically very high-level, as the frantic pace of withdrawal of gas from a rapidly depleting inventory was allowed to slow. Consequently, the year-to-year deficit in natural gas storage last week was estimated at 700 bcf, about 35% below the same level a year ago.

But it would not take much to leave US natural gas storage at a drastically low level at the end of the season, as temperatures would have to suddenly become unseasonably warm for the duration of the winter to do much to reverse the draw on natural gas stocks.

Gas price forecasts jumped

This kind of outlook has analysts scrambling to jump their forecasts for natural gas prices for 2001 and 2002.

UBS Warburg, once again, has raised its projected composite spot natural gas price forecast for 2001 to $5.75/MMbtu from $3.80/MMbtu

The analyst contends that its revised increase reflects the near-depletion of natural gas supplies, ongoing deliverability limitations, weak increases in Canadian imports, and a demand increase of baseload and peaking power generation.

For 2002, the analyst projects a composite spot price of $3.75/MMbtu. "Beyond residual pricing tightness carrying over from 2001, this forecast reflects an easing in demand destruction from unprecedented early 2001 [price] levels, further growth in power generation demand, as well as our continued conservative view toward overall deliverability…[in the form of] continued rapid wellhead decline rates and ongoing limitations in net Canadian imports," said UBS Warburg.

An even more aggressive forecast comes from Lehman Bros., calling for a 2001 natural gas price forecast of $6.25/MMbtu, vs. its previous prediction of $5.00/MMbtu.

Lehman Bros. also projects a 2002 forecast of $4.50MMbtu, up from its earlier prediction of $4.15/MMbtu.

The reason? Lehman Bros. expects the US will exit winter with storage at about 200-400 bcf, making it unlikely that industry will be able to refill storage for next winter. That puts the storage shortfall at a level about equal with 6-7% of production over the 7-month refill season.

US supply-demand concerns

There doesn't seem to be any way around a tight gas market this year in the US, given expectations for even sizeable increases in production and decreases in demand.

Salomon Smith Barney thinks that natural gas prices "should remain on a relatively strong course," even if US gas production rises by more than 5% in 2001 and the US economy slows.

"If weighted temperatures for the remainder of this winter average 5% colder than normal [temperatures have averaged 15% colder than the 10-year average so far this season], our models indicate that, adjusting for incremental fuel-switching, less stripping of natural gas liquids, and reduced demand from the ammonia and methanol industries, storage levels exiting the winter would be around 500 bcf.

"This would certainly maintain upward pressure on natural gas prices and perhaps render our $5/MMbtu full-year 2001 composite natural gas price forecast conservative."

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