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Analysts See Spring Price Plunge Followed by Major Winter Spikes

Analysts See Spring Price Plunge Followed by Major Winter Spikes

With weather forecasts producing bearish news at every turn and national storage reserves looming ever larger, Raymond James &amp Associates recently published a report projecting spot wellhead gas prices will drop below the $1.50/Mcf level before the beginning of summer. The study, however, also warns of a gas "price shock" in early 2000, when gas shortages run rampant and production is unable to keep up because of sharp declines in exploration and production spending. It seems the industry is in store for a spot market roller coaster ride.

The report says the next few months look bleak. "Unfortunately, if we end up [this] heating season with 1.4 Tcf of gas in storage and U.S. production does not decline substantially, then typical injection levels would drive gas storage in October into the 3.5 Tcf range. The only problem with this calculation is that there is only about 3.1 to 3.2 Tcf of available storage [space]. This supply/demand model suggests that U.S. natural gas prices could be pushed below $1.50/Mcf, as [the heating season ends] and excess [stored] gas floods the spot market." The study calculates temperatures have been 10.39% warmer than normal so far this year. The overall heating season is expected to be 9% warmer than normal.

Along with the foreboding short-term projection, the study also indicates the industry is in for quite a surprise over the long-term. "Unfortunately we believe the supply side of the equation is getting ready to head downward."

The study points out that when the criteria is adjusted for these abnormal temperatures, "real" underlying demand has grown 1-3% over the past three years. Assuming a normal 1999/2000 winter, the study projects an 8% increase in gas consumption for the heating period. This increase, combined with a flat to small decrease in production, will cause a price spike.

"I think it will be similar to the shortages experienced in the 1995/96 winter," said J Marshall Adkins, a Raymond James &amp Associates spokesman. "Is the Henry Hub going to average double digits? No. But many spots will see spikes to the $5.00/Mcf range."

Confirming the down-before-up projection of Raymond James &amp Associates is a separate study released by the Energy Information Administration (EIA). In its Short-Term Energy Outlook, EIA said spot gas prices will not exceed $2/Mcf until the fourth quarter of 1999. But after prices rise above the $2.00 mark, the EIA said, "on a quarterly basis, wellhead prices are not projected to dip below $2.00/Mcf for the entire year" 2000.

PaineWebber, in its research into the spot market, also is expecting prices to turn around later this year. PaineWebber noted the U.S. rig count as of Feb. 5 established a new record low as it fell to 558, down 43%, or 416 rigs, from the same time last year. "We expect the impact of increasing natural gas demand and declining deliverability to result in higher prices later this year."

John Norris

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