Due to a host of factors including supply disruptions related to Hurricane Katrina, Raymond James analyst J. Marshall Adkins said last week that he is raising the consulting company's near- and long-term commodity price forecasts for natural gas and oil.
In addition to the fallout from Katrina, Adkins said the reasons behind the increases also related to tightness in the markets from "insatiable demand" and slow supply growth response. As a result, the analyst increased his team's forecasts for full-year 2005 to an average of $56/bbl for oil and $7.90/Mcf for natural gas, up from previous estimates of $51/bbl and $6.86/Mcf.
The group also increased the outlook for 2006, raising oil from $52 to $58/bbl and natural gas from $8 to $9.25/Mcf. He even increased long-term oil and gas forecasts, which continue to incorporate a 2% inflator. "Even though our new forecasts are more than 15% above consensus expectations, they are 15% below the futures strip," Adkins said in Raymond James' latest Energy Stat of the Week. "Ultimately, we believe that the futures market will be more right than Wall Street. We note that this new forecast does assume a pullback in oil prices in 1Q06," when there is the potential for large oil inventory builds.
Regarding natural gas, the group said warm summer weather and Hurricane Katrina have allowed gas prices to "finally" recover from the unusually mild weather of 2004. Adkins pointed out that for the first time in over a year, gas is now trading at 6:1 Btu parity with oil, vs. price ratios above 8:1 in the first half of 2005. Going forward, he expects natural gas prices to continue to trade at approximately Btu parity (6:1) with oil.
"We continue to emphasize that the underlying fundamentals for natural gas remain extremely bullish," Adkins said in the brief. "The sentiment in the gas market has steadily improved during the summer of 2005, and the substantial production disruption following Hurricane Katrina led to a major spike in gas prices in late August and early September. We would point that further surges in gas prices, similar to the one that occurred after Katrina, are entirely possible over the next 12 months, depending on the weather."
The group's new 2006 forecast is $2.50 (or 36%) above Street consensus, but is far below current futures pricing. "We also believe that over the longer term, our 6.3:1 parity assumption will prove to be conservative, as the crude oil to natural gas price ratio should be closer to 5.5:1, reflecting the higher costs associated with consuming heating oil equivalents," he said. "This could easily be achieved under a warm summer or a normal to colder-than-normal winter weather scenario. Even at $50/bbl oil prices, a 5.5:1 ratio would imply low $9/Mcf natural gas. At $60/bbl oil, the ratio implies gas prices above $10/Mcf. The bottom line remains simple: The combination of falling domestic gas supply, a strong U.S. economy, and favorable fuel-switching ratios are going to eventually result in natural gas prices trading at or near Btu parity with petroleum liquids."
The analyst added that while U.S. natural gas prices have generally been the energy stock price driver over the past decade, oil has recently become the dominating topic of conversation. Going forward, he believes that natural gas will be linked much more closely with oil prices than has been the case over the past two decades.
"As was mentioned previously, we believe that in a normalized weather scenario, the midpoint of U.S. natural gas will be linked to oil prices with a 6:1 Btu parity price ratio," he said. "If the gas markets feel temporarily comfortable about the supply/demand balance, gas is likely to trade below this midpoint range (as was the case in the first half of 2005). Likewise, if the gas markets become temporarily concerned about the supply/demand balance (as happened in the weeks after Katrina), we could easily see gas trade above this midpoint range."
Adkins said the largest risk to the natural gas price forecast is weather. "A much greater percentage of weather-sensitive demand now exists than just a few years ago, as price-sensitive demand has been rationed, primarily from industrial consumers," he pointed out. "Volatility in gas prices due to short-term weather factors should therefore be expected to continue."
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