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Energy Consultant: Stage Set for Continued Upward Pressure on Gas Prices

With spot crude prices rising at a stronger-than-expected pace, actual cooling degree days (CDDs) about 13% higher than a year ago and the natural gas consumption impact per CDD above 2004, the stage is set for continued upward pressure on gas prices for the next few months, according to Stephen Smith Energy Associates.

The energy consultant said in his June report that the odds "favor some if not all of these factors influencing gas markets for the full summer. In addition, there are expectations for a stronger than normal hurricane season. All of these factors taken together appear to set the stage for upward pressure on gas prices for the next few months."

Smith is forecasting third quarter Henry Hub gas prices to average $7.40/MMBtu, and for the fourth quarter the forecast is $7.85/MMBtu. Smith's resulting average annual bidweek Henry Hub price forecast for 2005 is $7.05/MMBtu, well above an earlier forecast of $6.40/MMBtu. His forecast is above the Energy Information Administration's prediction that prices will remain at $6.50-7/Mcf through the summer and end the year around $7.50 (see Daily GPI, June 13). A few days ago, Raymond James analysts forecast that gas prices would approach a 6:1 parity with oil by the end of the year, which could put gas prices at $10/Mcf (see Daily GPI, June 28).

Smith said that higher prices for oil "may have had more to do with the recent strength in gas prices than the decline in the gas storage surplus that we have seen thus far. But if the warmer-than-normal weather continues, as projected by many weather forecasts, the erosion of the gas surplus could become the more dominant driver of upward gas prices movement as the summer progresses. The 'surplus reducing' impact per CDD-above-normal appears to have increased by 5-6% for this summer as compared with last summer."

Smith noted that the gas storage surplus has declined from 420 Bcf (over 10-year norms) on June 3 to a projected 338 Bcf for the week ending July 9. "This spread, however, is still well below the $1.50/MMBtu that existed in June 2004 because the current storage surplus, while declining, is still about 140 Bcf above year-ago levels."

Smith said that post-2003 seasonal storage preferences are "perhaps 200-250 Bcf higher than historical seasonal norms. If adjusted for these new storage preferences, the projected July 8 surplus would be only 88-138 Bcf. Given that the surplus is projected to be reduced by a total of 82 Bcf for the five weeks ending July 8, with an expected total of 38 CDDs above normal for this period, the adjusted 88-138 Bcf surplus does not appear so large that it could not be eliminated by fall."

If the ratio of 2.15 Bcf of surplus reduction per CDD-above-normal were to hold going forward, Smith noted that the 138 Bcf of surplus could be eliminated by early October with CDDs of only 4.9% above normal. And, he added, "the National Weather Service and all private weather forecasters (that we know of) are forecasting a hotter than average July through September."

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