Analysts: Price Woes in 1999?...Maybe
Will production declines expected to stem from the recent rash
of producer spending cuts (see related story) lend support to gas
prices this year? Well that's just one of several questions on the
minds of analysts as they speculate on what the market will grant
producers this year. While there's not a consensus, the general
mood seems to be pessimistic.
"There's not much holding [gas prices] up," said Thomas J.
Woods, Ziff Energy vice president for U.S. Gas Services. Woods said
Ziff has been warning its clients that current prices are not
supportable. "We had put out some early warnings in July when
prices first frayed, and we said that there was a very significant
possibility that this would go [on]."
Ziff doesn't release its price projections, but Woods conceded
compared to its peers, Ziff Energy is "probably a lot more
conservative about gas prices." Woods said he doesn't think the
Nymex will average more than $2.00 for 1999, and it could be
He noted in the aggregate, gas sales have been essentially flat.
"There's probably going to be no growth in gas sales for four or
five years on an aggregate basis." December's high storage levels
suggest to Woods there is more downward pressure on prices to come.
"Sooner or later somebody is going to have to move that storage or
somebody is going to leave that gas in storage and pay the
And there is increasing pressure on processors and producers now
due to low liquids prices relative to gas prices, noted Woods.
Producers, who once were able to pay for processing with liquids
removed from the gas stream, now are being asked to pony up with
What remains to be seen, according to Woods, is whether prices
will ease down further or plummet. "The question is what's the
magic witching price for the strip price going out 12 months that
would really panic people. I would watch the December of 1999
[contract] or January or February of 2000. If they can hold even
though the market is plunging, then you're going to have a soft
landing. But if they start to not be able to hold, then you're
going to have a hard landing."
Not so pessimistic is PaineWebber's Ronald Barone. "We're still
at $2.40 [composite spot wellhead price] for the year, but we could
be a bit on the high side because of the surplus gas in storage and
the overhang. I'm not going to cut [the estimate] yet because I
think it's a doable number." Barone said he thinks this summer's
prices will be in the low $2.00 range, noting there will be a lot
of gas-fired generation coming on line, "and I think that gas-fired
capacity will push up demand." Further, recent declines in drilling
activity will begin to take their toll on productive capacity,
further tightening supply, he said.
Jefferies & Co. analyst Carl Kirst said his firm will release
lowered price estimates today. Last week, the official Jefferies
prediction was $2.15 for a national average at the wellhead and
$2.35 at Henry Hub. "Clearly, we're reassessing our first quarter
and our 1999 outlook. At the same time while you have some risks
here in the first quarter, particularly over the next three to four
weeks, if you have normal weather from here to the end of March,
our models are basically putting out we can get to the same storage
level we had last year." That is, Jefferies still thinks the
industry can eat through a storage overhang greater than 600 Bcf.
With that Kirst said prices this year could be "a little bit
better" than last year's. While he said Friday that today's revised
estimate would be lower than the previous $2.15, it likely would be
stronger than 1998's $1.95.
Jefferies is expecting storage at the beginning of injection
season, Nov. 1, to be 150 to 200 Bcf below the same time last year.
That's based on projections for a 2.4% demand increase over last
year coupled with flat domestic supply, noting a slight increase in
imports from the Northern Border expansion. "The wild card is,
'gee, do you actually see a decrease year over year in production?'
I guess if there is a piece of the puzzle everybody has their eye
on, I think that's it." For next August and September, Jefferies
predicts flat demand growth from last year because this summer is
not expected to be a repeat of last year's scorcher. Noted Susannah
Hardesty, president of Energy Research & Trading Inc., "With La
Nina weakening slightly this summer, expect cool temperatures, wet
weather and an active hurricane season." We'll see, said Kirst.
"Keep in mind the conventional wisdom was La Nina was going to
bring a brutally cold winter."
Gas analyst Ron Denhardt of Burlington, MA-based WEFA Inc. said
his firm is forecasting $2.02/MMBtu at the Henry Hub for 1999. The
big market movers in "the coming months are going to be clearly
storage and weather. I guess we were assuming a somewhat warmer
than normal January through March, and we came up with storage
[inventory] 450 Bcf ahead of last year [for the first quarter]. We
see that storage as being a big overhang." Compounding the
situation in his view are more hydropower due to greater rainfall
in the Northwest, growing gas supplies from the Northern Border
expansion, and low oil prices. Woods said oil already has captured
significant amounts of the market in the East.
Price predictions are subject to revision and sometimes little
more than guesses, and there's nearly an entire year left to see
what happens, but "eventually a normal winter has to come the
Joe Fisher, Houston