Analyst forecasts $3.35 gas price for this year

Market analysts Dain Rauscher Wessels Energy Group, a division of Dain Rauscher Inc., raised its US natural gas price forecast for 2000 to $3.35/Mcf from $2.85 to reflect depletion rates, higher demand, and low storage levels.


Market analysts Dain Rauscher Wessels Energy Group, a division of Dain Rauscher Inc., raised their US natural gas price forecast for 2000 to $3.35/Mcf from $2.85 to reflect depletion rates, higher demand, and low storage levels.

"Our new gas price forecast of $3.35 [and] $3.00 for 2000 [and] 2001, [respectively], if confirmed in actuality would represent the strongest two consecutive years for gas prices ever by a margin of roughly 20%. The best single year historically was $2.76 in 1996, and the second-best single year was $2.53 in 1997. The key reason for this stronger forecast is that some combination of domestic gas production weakness and stronger-than-expected spring demand has resulted in a subpar rate of spring inventory build-up," said a May 30 report.

A survey conducted by DRW concluded US supply is down almost 4% from this time last year. The analysts said it expects depletion levels to require more than the usual number of gas rigs working to increase deliverability.

DRW said spring gas demand may also be stronger than normal. Good oil prices have encouraged a high rate of liquids extraction, reducing the btu content of the gas. Also, start-up of new gas-fired generators has been a driver, as has been demand-switching from oil to gas when oil was $25-30/bbl and gas closer to $3/Mcf. With gas at over $4, the switching-to-gas incentive will be only slightly reduced.

In addition, the firm said, "AGA [American Gas Association] gas inventory as of May 17 was 1,218 bcf, which is approximately 24 bcf below the 5-year seasonal norm, and 414 bcf below last year. Over the last 6 weeks, inventory has increased at a rate of 4.4 bcf/day as compared with a normal 8.2 bcf/day build rate for this period. If a gap of this size continues in the build rate for the balance of the quarter, we estimate that AGA storage is likely to end the second quarter at approximately 1,610 bcf. This would be 190 bcf below the seasonal norm. The futures market appears to be already anticipating such an outcome.

"We see the current supply-demand tightness extending through 2001 and probably longer. The central problem is that the traditional "go to" gas supply region, the shelf of the Gulf of Mexico, has become very mature and is now facing gradual production decline. Its role will gradually be replaced with other North American supply provinces, but total supply is likely to flatten in the transition period, while demand growth will continue to grow (demand has been flat due to three near-record mild winters in a row)."

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