With natural gas futures prices reaching six month lows in late January, energy analysis firms are having to reassess their 2006 price estimates to account for the unseasonably warm weather streak that much of the U.S. has experienced this winter-to-date. Analysts at Raymond James said last week that they were lowering their natural gas forecasts for the first half of 2006 due to "highly unfavorable weather."
February natural gas, which expired Jan. 27 at $8.40/MMBtu, experienced a meteoric fall over the past month and a half. Since the warm weather trend hit in mid-to-late December, February natural gas plummeted from a high of $15.78 on Dec. 13, 2005 to an intraday low of $7.75 on Jan. 26, marking an $8.03 swing.
Due to the mild weather this late into the traditional heating season, analysts at Raymond James lowered their 1Q2006 gas forecast from $12.50 to $9.50/MMBtu and their 2Q2006 forecast from $9.75 to $8.00/MMBtu. As a result, the analysts' full-year 2006 average gas price forecast dropped from $10.50 to $9.31/MMBtu.
"We are not changing the forecast for the second half of 2006, as we are expecting a more normal oil-gas price ratio to be reestablished under a normalized weather scenario," said J. Marshall Adkins, an analyst with Raymond James. Despite lowering the natural gas forecast, Adkins said he continues to emphasize that the underlying fundamentals for natural gas also remain very bullish.
"Prior to the hurricanes, the sentiment in the U.S. gas market had improved with the warmer-than-normal summer of 2005," Adkins said in Raymond James' latest Energy Stat of the Week report. "Of course, the production disruptions following Hurricanes Katrina and Rita sent the gas market into shock, leading to major price spikes. Since August, gas prices had remained well above $10/Mcf until early January."
Under a normalized weather scenario, Adkins said he believes that the midpoint of U.S. natural gas will be linked to oil prices with roughly a 6:1 Btu parity price ratio, putting fair value for gas in 2006 near $10. However, he warned that if the gas markets feel temporarily comfortable about the supply/demand balance, gas is likely to trade below this midpoint range.
"The unseasonably warm weather that has lingered across much of North America in January has tremendously depressed gas prices, sending them down almost 50% from their all-time highs in December," he said. "Of course, we may still see a cold spell in the coming weeks, but we want to err on the side of conservatism."
While lowering its gas forecast, Raymond James raised the company's 1Q2006 oil forecast from $57 to $62/bbl to reflect the widened geopolitical risk premium due to the Iranian nuclear dispute. The increase changes the full-year 2006 forecast from $58 to $59.25/bbl.
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