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 &
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 &
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 &
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
©Copyright 1999 Intelligence Press, Inc. All rights
reserved. The preceding news report may not be republished or
redistributed in whole or in part without prior written consent of
Intelligence Press, Inc.