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Two Analysts Forecast $9-Plus Gas Prices in 2006

Consumers are likely to see very little price relief next year, according to two industry prognosticators. Arlington, VA-based consulting firm Energy and Environmental Analysis Inc. (EEA) is predicting gas prices will average $9/MMBtu in 2006, while analysts at Raymond James & Associates say extremely bullish underlying fundamentals will keep prices between $9.50 and $10 next year.

EEA said depending on the weather, Henry Hub cash prices could average between $8 and $18 this winter. In a presentation at the Energy Information Administration's Winter Fuels conference, EEA's Kevin Petak, said he expects winter prices to average $13 because 2 Bcf/d of Gulf gas production on average is expected to remain offline through March.

The company noted that storage levels probably will enter the winter heating season at about 3.1 Tcf, or about 200 Bcf below last year's level. EEA also expects that total U.S. gas production won't return to June 2005 levels of 51.4 Bcf/d until next August. However, industrial demand destruction due to high prices will help balance the market.

"U.S. Lower 48 production should steadily increase through 2007," EEA said in its Monthly Gas Update. "However, it will still not reach levels achieved in 2001. Production is projected to average 49.7 Bcf/d, 51.1 Bcf/d and 51.8 Bcf/d in 2005, 2006 and 2007, respectively. The potential for real production gains from high drilling levels in 2005 have been set back by hurricane-related damage to Gulf Coast production."

Meanwhile, EEA said 2005 U.S. imports of liquefied natural gas and Canadian production should be near 2004 levels.

Analysts at Raymond James said they expect the oil and gas price ratio will hold at 6:1, putting gas prices at about $9.25 next year based on oil price forecasts. "Even though our new 2006 forecast is $1.60 (or 20%) above Street consensus, it is far below current futures pricing," they said in a note to clients last Monday. "The bottom line remains simple: The combination of falling domestic gas supply, a strong U.S. economy and favorable fuel-switching rations are going to eventually result in natural gas prices trading at or near BTU parity with petroleum liquids."

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