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Raymond James Boldly Predicts $10 Gas Next Winter

Raymond James Boldly Predicts $10 Gas Next Winter

Many industry analysts have been steadily raising their gas price forecasts because of the year-long drilling slump and its potential impact on gas deliverability, but St. Petersburg, FL-based Raymond James &amp Associates went out on a limb last week predicting sharp price spikes above $10/Mcf at the Henry Hub next winter and an average of $3/Mcf at the hub next year.

"Given that we think there is a significant potential for spot natural gas shortages next winter (winter of 1999/2000), we believe there is substantial potential for U.S. natural gas prices to temporarily move into the double-digit range," Raymond James energy analyst J. Marshall Adkins said in a gas market report. "Perhaps more importantly, this kind of supply shock would likely awaken the natural gas markets to the true underlying gas supply and demand fundamentals. Such an awakening should drive average 2000 natural gas prices well above levels we have seen in the past. We believe that once the U.S. gas markets receive their wake-up call this winter, average gas prices above $3/Mcf in 2000 are very realistic."

Adkins noted that simply a return to normal temperatures next winter will boost gas demand 8% compared to last winter. Meanwhile a conservative prediction on gas supply shows at least a 2% drop, or about 1.2 Bcf/d. Some producers, such as Enron Oil &amp Gas Chairman Forrest Hogland, are expecting much larger declines of up to 3 Bcf/d.

With strong demand and short supply (even including a 5% rise in imports from Canada), the existing storage surplus will be depleted rapidly, the Raymond James report stated. The American Gas Association reported another week of minute injections last Wednesday. On April 23, there was 1,374 Bcf of working gas in U.S. storage facilities and the surplus compared to last year was down to only 175 Bcf, the AGA said. Raymond James expects there to be the typical 3,100 Bcf of working gas in storage by November, but with the decline in wellhead deliverability, withdrawals from storage next winter will far exceed the normal pace.

"Our numbers suggest that we will exit the winter setting all-time record lows for natural gas storage," Adkins said, predicting storage will end the winter with only 270 Bcf of working gas, a historic low that would be difficult to reach. There's a 70% probability storage will end the winter heating season below 700 Bcf and "history suggests that ending storage below 700 Bcf should result in $10/Mcf or higher gas prices."

"What if our base case is wrong" Raymond James asked, and winter temperatures are 5% warmer than normal? Gas storage still would end the winter below 700 Bcf. And given the incomprehensible possibility that winter temperatures could be 5% colder than normal, Raymond James said there would be a need to draw down storage to negative 141 Bcf of working gas by March 31. "In either case, we have a problem."

Rocco Canonica

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