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Raymond James Ups Forecast But Warns of Possible Price Collapse

Analysts at Raymond James & Associates Inc. raised their 2008 gas price forecast to $10/Mcf from $8/Mcf and said they expected stronger summer prices due to recent weather that has been colder than average, low imports of liquefied natural gas (LNG) and ongoing repairs at Independence Hub in the Gulf of Mexico.

Summer weather that is hotter than the 10-year norm could yield gas prices at or above $10-12/Mcf; however, cooler-than-normal weather could mean late-summer prices of $6-8/Mcf, the analysts wrote in a research note last week.

"Despite the higher forecast, it is important to note that we think there is still significant risk to late-summer natural gas prices," the analysts said. Tempering Raymond James' higher price outlook is a 7% year-over-year growth in supply and strong output from hydroelectric power generators and "easy weather [comparisons] late in the summer." They said these factors could eliminate the year-over-year gas storage deficit by the end of the summer.

"As such, we still believe there is a 50/50 chance that gas prices collapse later in the summer," the analysts wrote. "If weather is warmer than normal, summer gas prices hold up in the $12/Mcf range. If it is mild (i.e., cooler than the 10-year normal), then we may still see $6-8/Mcf gas."

Raymond James said its new summer 2008 model suggests that gas storage will be about 3,550 Bcf at the end of October, which is nearly 100 Bcf less than the firm's prior 3,641 Bcf estimate. The change is mainly due to colder weather. The new storage outlook is about even with the 3,545 Bcf seen at the end of last summer and would put the industry on the brink of production shut-ins, the analysts wrote.

"Recall, shut-ins occurred in 2006 with storage at 3.45 Tcf and in the Rockies last year," they wrote. "In other words, late-summer gas prices remain a weather bet. A 10% change in weather versus the 10-year average can increase or decrease ending storage by over 200 Bcf."

The analysts noted that the first nine weeks of summer have been "much colder than the 10-year average." Additionally, they echoed comments heard throughout the industry on the dearth of LNG cargoes expected to arrive at U.S. ports (see NGI, May 26; May 19). The analysts cut their assumption of a 0.3 Bcf/d year-over-year increase in LNG imports to a 1 Bcf/d reduction in imports year over year. As for Independence Hub, it's ramping back up now (see related story).

Overall, the analysts wrote that they expect supply (including imports and exports) to be up by about 1.6 Bcf/d this summer while demand should increase by only about 0.2 Bcf/d. This yields the expectation of an approximate 1.5 Bcf/d oversupply relative to last summer, the analysts estimated.

In another note last week, SunTrust Robinson Humphrey analyst John Gerdes said he predicts a $9-10 gas price for 2008-2009 predicated on an approximate 2% increase in North American drilling activity this year and a 3% increase in 2009. "A $9-10 average gas price appears necessary to provide the financial incentive to modestly increase U.S. drilling activity and maintain gas market equilibrium in '08," he wrote. He predicted a 2.8 Bcf/d increase in U.S. onshore production this year on the expectation of a 2% increase in the gas rig count.

As for LNG, Gerdes said he expects 2008 imports of 1.7 Bcf/d, which includes start-up of liquefaction trains in Equatorial Guinea and Norway and the expectation of lower LNG imports from Algeria, Nigeria and Trinidad due to stronger demand in Europe and Asia.

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