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Summer Price Outlook: Is the Cavern Half Full or Half Empty?

While one analyst team sees a 50% chance for a late-summer gas price collapse, another warned last week that a projected 250 Bcf year-over-year storage deficit at injection season's end could set the stage for Henry Hub price spikes, given the continued dearth of incremental liquefied natural gas (LNG) supplies available to the United States.

"Our updated gas model shows that if the U.S. has normal (10-year average) weather this summer, it will be on the brink of having to shut in gas production, with a corresponding gas price collapse later in the summer. In other words, we now think there is a 50/50 chance that gas prices collapse later in the summer," wrote analysts at Raymond James & Associates Inc. in a brief last Thursday.

On the other hand, as the United States must compete with European benchmark prices for marginal LNG cargoes there is "increased upside risks to natural gas and potential for substantial price spikes should LNG become the source of the balancing MMBtu for the North American market. With U.S. storage levels heading toward at least a 250 Bcf y/y deficit at season-end, the relationship could take on a particular importance should August and September present the market with extensive heat- or weather-related supply disruptions," wrote analysts at Barclays Capital in a weekly report published last Tuesday.

Last week energy analyst John Gerdes of SunTrust Robinson Humphrey/the Gerdes Group said in a report that many factors are causing gas storage levels to look like they might be lower than normal this winter (see related story).

According to Raymond James, the risk of a late-summer price collapse has declined of late as lower gas storage levels are taken into account. "In fact, bullish y/y LNG comparisons helped support U.S. natural [gas] prices through the end of July and should continue to do so for the rest of the summer, albeit at a lesser rate," the analysts wrote. Indeed, the group on June 2 raised its 2008 price forecast to $10/Mcf from $8/Mcf (see NGI, June 9).

"However, since it has become clear that Asian demand will not wither as it has in previous summers, we are revising our summer LNG import estimate from down 0.5 Bcf/d to down 1 Bcf/d y/y," the Raymond James analysts said.

And global demand for LNG along with the fact that the Henry Hub trades at a discount -- at times substantial -- to the United Kingdom's National Balancing Point (NBP) is where the attention of the Barclays analysts is focused.

"As the prompt-month Henry Hub prices have rallied 28% over the past two months, the UK NBP-Henry Hub differential has narrowed to 47 cents/MMBtu in May and 64 cents in June, compared with the $1.72 average over January to April," noted the Barclays analysts. "While the first few days of July have experienced Henry Hub briefly approaching NBP levels within 60 cents, the differential has again widened to over $1.30/MMBtu. Forward curves for UK NBP and Nymex Henry Hub spell more of the same."

Although recent price strength at Henry Hub should help the U.S. "attract a few additional cargoes in the next two months," the Barclays analysts wrote that imports to the U.S. should remain depressed relative to last year and continue to linger near five-year lows. "We expect [LNG regasification plant] sendouts to average 1.1 Bcf/d over the course of the summer injection season," they wrote.

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