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Double-Digit Gas Prices Through Summer, but...See You in September

Several factors point to natural gas prices of around $11-12/MMBtu or more through the summer, but if there are no large hurricane production losses, the surge in onshore gas production in the storage surplus "could be visible for all to see" by late September, said an energy analyst.

In the latest Monthly Energy Outlook by Natchez, MS-based Stephen Smith Energy Associates Inc., the analysts said a combination of things likely will lead to double-digit gas prices for the next few months:

Smith's "base case price outlook" through late July also takes into account West Texas Intermediate crude prices will range between $100/bbl to $140/bbl, private weather service degree-day projections, no lost production from summer hurricanes and that the deepwater Independence Hub will return to service by June 10 (see NGI, May 19).

"These assumptions lead to a projected storage level of about 2,530 Bcf on Aug. 1, which would represent a surplus of 340 Bcf versus 10-year storage norms (down about 55 Bcf from the current storage level," the report noted. "In this environment, we estimate a late gas-to-residual spread in the range of minus $2.50/MMBtu to minus $1.50/MMBtu," which would "imply a likely August Henry Hub bidweek price range of $11 to $12/MMBtu...The August 2008 Henry Hub contract closed at $11.86/MMBtu on May 23."

The analysis, which projected a gas storage surplus of 395 Bcf for the week ending May 23, "remains close to being the lowest since the aftermath of hurricanes Rita/Katrina in the fall of 2005." However, more important to note "is that the storage surplus has increased over the past two months despite slightly more total degree-days than normal, extraordinarily weak LNG [liquefied natural gas] imports, and very little Independence Hub gas production."

The market "is keeping a wary eye" on the Department of Energy's "strong domestic dry gas production rates over the last few months," noted the report. Current gas futures prices "would appear to represent the best of times for gas producers. In the current oil price driven euphoria, producers should not confuse their present good fortune with strong supply/demand fundamentals. The market situation is often not as straightforward as it appears and this may be one of those times."

Gas storage market behavior over the past two months suggests "an underlying weakness, which may be masked by the current market euphoria," according to the analysis.

In the eight-week period ending May 23, the report noted that total heating plus cooling degree days were 1.7% above normal, LNG imports averaged less than 1 Bcf/d as compared with 3-plus Bcf/d last year and Independence Hub production averaged only 20% of its 1 Bcf/d capacity following the early April shut down, which still continues.

"Despite these weak supply factors and slightly above-normal-degree-days, the gas storage surplus versus 10-year norms, increased by 35 Bcf over the last eight weeks, from 360 Bcf to a projected 295 Bcf for May 23," said the report. "We believe that strong domestic onshore production is the most likely explanation for most of this eight-week increase in the storage surplus in the face of weak LNG imports and weak offshore gas production...

"Our working assumption is that onshore gas production strength is more than offsetting the current weakness in LNG imports and the missing Independence Hub gas. Arguably, this onshore production strength was partially masked by the large storage draw, which resulted from a colder-than-normal winter."

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