Recent weather-driven improvements in the U.S. natural gas market notwithstanding, Raymond James & Associates Inc. energy analysts are holding to their contrarian view on U.S. gas prices. A major gas supply increase this summer, brought on by increased liquefied natural gas (LNG) shipments, "should translate to gas-on-gas competition" later this year.
The current "abnormal weather conditions" have to persist, and "yes, the next four weeks are important" to overcome the bearish gas price views of analysts J. Marshall Adkins and Pavel Molchanov, who wrote their comments in a note to clients. "That said, we remain more bullish than the Street on oil as OPEC seems to be perfectly content with the current tightness in the global oil market. Accordingly, our preference is for oil-weighted (often, though not always, larger) E&P [exploration and production] and service companies. We also have a positive long-term stance on coal and alternative energy, albeit tempered by the possibility of a near-term pullback in oil and especially gas prices."
Earlier this month Raymond James hosted an institutional investors conference, and during the presentations "energy companies consistently set forth very bullish outlooks for 2008 and beyond -- indeed, generally more bullish than our numbers suggest," wrote the duo. Five major recurring themes were identified from the conference:
The most common question at the conference: "When are you finally going to give up and fall on your gas bear sword?" Adkins and Molchanov wrote. "Obviously, much colder than normal weather and strong gas charts over the past month have substantially bolstered the bullish side of the gas story. Just in the past five weeks, colder than normal weather has led to gas demand some 300 to 400 Bcf higher than our original model!"
However, Raymond James' current summer gas price forecast still calls for $5.00/Mcf gas prices in 3Q2008, which are well below the current gas futures strip. "Despite the verbal abuse heaped upon us by both buy-siders and energy companies, we continue to believe that it is too early to buy into $10 summer natural gas prices."
Why does the Raymond James team remain bearish on gas prices?
"First and foremost, year-over-year U.S. natural gas supply in December was up a whopping 4 Bcf/d (or 7%)," wrote the duo. "Current company guidance suggests that year/year gas supply growth could actually increase as we move into the summer. Secondly, we are modeling U.S. LNG imports down for the full year 2008 but up modestly through the middle of the summer. Simply put, global LNG demand always falls in the summer and the U.S. has most of the gas storage capacity. Finally, we think the gas market is underestimating the amount of gas-fired electric demand that will be displaced by high Northwest snowpack levels. Yes, industrial gas demand and gas-fired generation is growing rapidly (i.e., gas demand could be up 1 to 2 Bcf/d). That said, record snowpack levels should drive very strong hydroelectric generation this summer, potentially displacing as much as 1 Bcf of gas demand."
In total, Raymond James' summer gas model indicates the United States is likely to have about 2 Bcf/d more net gas year/year in the system. If winter-ending gas storage is above 1,300 Bcf, it would still imply gas production shut-ins and a subsequent gas price collapse this summer, the analysts noted.
The analysts' model is not quite as bearish as it was a month ago -- before the cold weather -- and if the cold weather persists for another month, "the U.S. gas market may escape the sleeping gas bear," said the analysts. "Bottom line: If colder than normal (we use the 10-year normal) weather drives winter-ending gas storage below 1,200 Bcf, summer gas prices probably will not collapse. If March-ending gas storage finishes above 1,300 Bcf, then summer gas prices are still very much at risk. Stay tuned!"
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