Gas price bulls can sit pretty this summer as industry analystsagree that the stage is set for strong demand, stressed supply andhigher prices in both the futures and cash markets.

PaineWebber reported an increase last week in its year 2000projection of composite spot delivered-to-pipeline gas prices from$2.40/MMBtu to $2.50/MMBtu. Ron Barone, a PaineWebber analyst andauthor of the report, also went a step further and raised his 2001projection from $2.40/MMBtu to $2.50/MMBtu. The new 2001 estimateis higher than the Wall Street consensus estimate of $2.46/MMBtufor the same period.

“These changes reflect ongoing increases in weather-normalizeddemand, depressed deliverability, as well as the reality that thedrilling response, while increasing, remains limited.”

The “lackluster” rig count, as Barone called it, was a majorfactor in the price increase. According to the report, the totalU.S. rig count was 768 for the week ended March 24. While up from526 for the month of March 1999, the report noted the total is downfrom 815 in mid-December. “We believe a total U.S. rig count inexcess of 1,000 is necessary to replace production. The reality isthat the 2000 rig count will remain well below 1,000 because offinancial and operational constraints.”

Supplies from Canada won’t help much this year, Barone said inthe report. The 1998-99 production cutback also limited supply fromthe North and Canadian imports are only expected to amount to 3.56Tcf this year, marking “only” a 6.6% increase from 1999. As acomparison, Barone said 1999 Canadian imports grew 9.4% in 1999.The Alliance system, which is being hailed as one of the majorimporters of Canadian supply when it becomes operational later thisyear, will only transport 65% of its available capacity, Baronesaid. He does not expect the pipe to reach its full potential until2002-2003.

Another key indicator, according to Bob Morris, an analyst withSalomon Smith Barney, is the gas storage level heading into theinjection season. With only one more American Gas Associationstorage report left in withdrawal season, supplies are hoveringaround the 1 Tcf mark. Morris said that it is highly likelyinjection season will start with storage levels close to 25% lessthan they were last year. Couple that with his estimate thatdeliverability is down 5% from last year and Nymex prices above$3.00 will not be uncommon this summer, Morris said.

“In late August we could see a push above $3.00 if the potentialfor a vast amount of unused storage space is realized and peoplestart buying gas for the winter. If we even have remotely normalwinter temperatures in the early months of the season, fourthquarter Nymex gas is very likely to average more than $3.00.”

His composite spot price average for 2000 is $2.52/MMBtu, andthat is a conservative number, he said.

While the supplies will be stressed, Barone sees clear sailingfor increased demand. Overall, gas-fired generation demand plusstorage refill injections could exceed available supplies by 2Bcf/d this summer. Several gas-fired power plants are expected tobe connected to the electric grid in the near future. Tighternitrous oxide and sulfur dioxide restrictions will be implementedthis ozone season, limiting output from oil and coal-fired powerplants. Oil prices remain relatively high, which should causefuel-switching utilities to use gas more.

These factors combine with a summer outlook issued by theNational Oceanic and Atmospheric Administration calling forabove-normal temperature averages throughout most of the U.S. tocreate a very rosy demand picture, Barone said.

The expected hot weather will have an impact in the next two orthree months, John Olson, a consultant at Sanders, Morris &Mundy said. “I expect a pretty stable price environment for thenext couple months, but any hot weather will cause price spikesearly on.” Olson predicted Nymex prices to stay between $2.50/MMBtuand $3.00/MMBtu, with the potential to top the $3.00 mark when theprices spike.

With gas prices expected to continue rebounding through thesummer, PaineWebber also expects higher profits for companies inthe industry as well. The report outlined activities of some majorgas players and gave a positive outlook on the industry. In fact,the firm raised its estimates and price targets for Coastal, Enronand Equitable Resources. It also upgraded Williams from neutral toattractive.

“In short,” Barone said in the report, “it has been a whilesince the fundamentals of this industry — or the average companywithin [the industry] — have been as strong as they stand today.”

John Norris

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