A combination of high U.S. natural gas inventories and difficult year-over-year weather comparisons means that gas should continue to trade "at worse" than an 8:1 ratio with crude oil through Oct. 31, Raymond James said in its latest "Stat of the Week."
"The bad news is that U.S. gas inventories are very high, and they should continue to look ugly through the summer," noted analysts J. Marshall Adkins and Darren Horowitz. More specifically, Raymond James' summer gas model suggests "we will set a new summer ending storage record of around 3.5 Tcf by the end of October."
While a warmer-than-normal summer or active hurricane season could "rapidly improve" the bearish gas outlook, there is still the possibility of a gas-price washout in the September/October time frame, they said. If storage operators run out of places to put gas in September/October, "the resulting 'gas on gas' competition would likely drive cash prices low enough to force producers to shut in some gas production. Our guess is this price would be well below the $6/Mcf level."
Currently, Raymond James' model suggests that with normal summer weather and no major hurricane disruptions, summer-ending storage could flirt with an over-full situation. The analysts' model used the amount of gas injected last summer, estimated injections for 2006, and then added that figure into the record winter-end storage of about 1.675 Tcf.
Overall, said the analysts, total U.S. gas supply is likely to be down about 1 Bcf/d relative to last summer mostly because of the production impairments caused by last year's hurricanes. Adding in industrial demand growth, normal-weather electric demand growth, and "assuming all remaining economic demand growth increases by approximately 1%, we believe core (or nonweather driven) year-over-year gas demand will be up a modest 0.6 Bcf/d."
However, the analysts cautioned they could be wrong. "In real life, the market will set a gas price that allows gas storage reservoirs to be more or less full by the end of October. Our guess is that 3.5 Tcf will represent 'full' storage at the end of October," and storage has never been higher than 3.4 Tcf. "To get to this 3.5 Tcf, the gas-to-oil price ratio must average about 9-to-1 for the entire summer."
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