Bullish Deutsche Bank Sees 'Structural Shift' in Gas Market
Natural gas industry analysts at Deutsche Bank have concluded
that a "structural shift" has occurred in the supply and demand
underlying the gas market, setting the stage for gas prices to hold
their current ground at more than $2.50 for the next two years.
"In our view, the old trading range of $2.00-$2.50/MMBtu has
been supplanted by a new $2.50-$3.00 range for wellhead prices,"
the group said in a report last week.
The group raised its wellhead price forecast to $2.75/MMBtu for
2000 and 2001 from $2.35 and $2.50, respectively. It forecasts
Nymex futures to average $2.90 in both years, up from prior
forecasts of $2.50 for 2000 and $2.65 in 2001.
As evidence of the "shift," Deutsche Bank notes that despite the
warmest winter on record and a dip in oil prices, gas futures
prices are trading above $3 on the New York Mercantile Exchange
(Nymex). "We attribute this strength to a growing recognition that
domestic demand is likely to outstrip supply, leading to both lower
storage and the need for higher import levels --- and higher prices
On the demand side, the group notes that industrial production
is picking up, power demand is growing and gas is the fuel of
choice for new generation. Deutsche Bank projects demand will
increase 3.8% to 22.2 Tcf this year and an additional 2.6% to 22.8
Tcf in 2001, which is up significantly from the 1% growth in 1999.
After declining slightly in 1999, industrial gas use is expected to
climb 4.6% in 2000 and 3% in 2001. Electric utility consumption is
forecast to grow 5.4% this year and 2% in 2001 despite its 4% drop
last year. Residential demand is expected to slide some this year
because of the warm first quarter but should rebound with 2.5%
growth next year, the group predicted.
Meanwhile, despite higher capital spending, domestic gas
production is not keeping pace and probably will continue to
struggle this year and next. Deutsche Bank analysts said they
expect domestic supply to rise by less than 0.2 Tcf to 18.85 Tcf
this year after flat production in 1999. "The increase in gas
prices, which started in 2Q99, has resulted in a rise in gas
drilling, but the types of wells being completed are tending toward
shallow, onshore locations, which are not as productive as the
deep-water offshore areas," the group said. "Drilling budgets for
the larger companies, which have stayed relatively modest so far
this year, could result in lower production than would otherwise be
expected." It estimates Gulf production will rise significantly
from 5.8 Tcf in 1999 to 6 Tcf this year and 6.2 Tcf in 2001. Output
from the rest of the U.S. in total, however, is expected to
continue shrinking from about 13 Tcf in 1998 to 12.8 Tcf in 2000
and 12.7 Tcf in 2001.
Furthermore, storage levels are near normal and are expected to
be "quite low by the start of the upcoming winter" because of
demand growth and supply constraints. The group projects storage
will reach only 2,650 Bcf by the start of next winter.
Imports from Canada are "unlikely to be able to fill the gap."
Many of the wells being drilled are shallow wells with high
The group admitted its own projections were more bullish than
others on Wall Street were. It said the "First Call mean," or the
current consensus of Wall Street analysts, is that wellhead prices
will average $2.55 this year and $2.50 in 2001. Rocco Canonica