Analysts Conservatively Forecast Prices Will Average $3.25 in 2000
With June natural gas futures soaring to a dizzying high of
$4.50 last week, projections by Lehman Brothers and Salomon Smith
Barney that spot prices will average $3.50 the rest of the year
seem a bit too conservative. A few weeks ago, those price levels
would have seemed astronomical.
In a research note released May 19, Robert Morris of Salomon
Smith Barney, said he expects prices to average $3.50 during the
third quarter and $3.75 during the fourth quarter of this year. His
full-year 2000 composite spot price forecast is now $3.25/MMBtu
(raised from $2.78/MMBtu) and his 2001 forecast is $3.25/MMBtu, up
from $2.65/MMBtu. Morris, however, admits these prices could be on
the low side. The 12-month strip on Friday was $4.15 and the
six-month strip was $4.239.
"[W]e expect deliverability to be off at least 1 Bcf/d this
summer compared with last year. This is based on a, perhaps
aggressive, assumption that the domestic natural gas rig count
expands to 700 by November (the domestic natural gas rig count is
currently 634). In addition, our analysis indicates that the
domestic gas rig count would have to rise above 800 just to return
domestic deliverability to where it stood at the beginning of 1999.
"In the interim, we expect the demand to increase due to
continued economic expansion and the start up of new gas-fired
electric generating capacity. Also, we don't expect much help from
Canada this year with the fundamentals and storage outlook similar
to the U.S."
Meanwhile, Richard Gross, senior vice president of Lehman
Brothers Energy Research, said he expects Henry Hub prices will
average $3.30 this year and $3.35 in 2001.
The industry simply "can't fill storage and meet power needs
this summer," Gross said in an interview with NGI last week. "We're
going to get pretty high prices and we aren't going to get storage
filled. As a result, we are going to have $3.25/MMBtu gas this year
(average wellhead price) and $3.35 next year, and if we're wrong
these prices are too low."
Gross, who discussed the booming market at the mid-year meeting
of the Independent Petroleum Association two weeks ago, said he
expects to see 2,600 Bcf of gas in storage on Nov. 1 if the
industry can match the injection pace of 1999 over the same period,
and that's a big "if."
"We've run about 2.2 Bcf/d less [than that] season to date.
We've got about 20% of the season complete. The big fill ---
whether we make or break the year --- is probably the next four or
five weeks," he said. "Once we get into the cooling season, it's
going to be tougher to get some of the big [injection] numbers.
We'll get another crack at it in September and October, depending
on what kind of weather we get. But so far, the early returns show
it will be a struggle to meet both markets."
Gross noted that last winter the industry relied more heavily on
storage for supply than in recent years because of a decline in
wellhead deliverability. Although wellhead deliverability probably
will improve some by next winter, the reliance on storage still is
expected to be significant. "If you look at the draw per degree day
in the last five years, it goes from about 0.35 Bcf per degree day
draw to 0.50 Bcf, 0.55 Bcf and to last year when it was 0.64 Bcf
per degree day. For each degree day we get, even if it's getting
warmer and warmer, we are utilizing storage more to supplement
wellhead supply. I don't think normalized is 0.64 Bcf per degree
day; I think it's probably in the high 0.50s Bcf. It's because
we've been short [wellhead supply]. We basically lived off of
storage in 1999; that's how we balanced the market. We won't have
that luxury in 2000 and 2001.
"Every which way you twist and turn and look at the market, it
just feels tight. If you talk to the processors (Dynegy, Duke,
Williams...) they'll tell you they are still struggling a little
bit. All of these things tell us it is going to be very difficult
to serve both masters this summer."
Gross said he doesn't expect producers to return to 1997 levels
of wellhead deliverability until 2002. "All of this is predicated
on fairly high drilling levels; for instance, the average between
2000 and 2004 has to be 50% higher in drilling activity than the
previous five years. Those are big-time assumptions. We've got to
man those rigs. We've got to develop those prospects. We'll see
where we go. I'm a firm believer in the resource base. I spent most
of my 25-year career as an E&P analyst so I'm relatively
sanguine about the response. It's just that there's a lag, which
makes 2000 and 2001 pretty tight."
Another bullish factor is hydroelectric generation, which is
short this year. "If you look at past years of depressed demand,
they have been very good hydro years. This year is going to be
mediocre, and that's a big swing. In California alone, from a
really good year to a crummy [hydroelectric] year, it is 300 Bcf of
demand, and in the second quarter it is probably 2 Bcf/d. It's
huge. We are seeing it right now. They have a couple of nukes down
out there. Normally they would get hydro, but they aren't getting
it this year." He said hydroelectric generation in January was down
more than 10%.
Gross estimates that there is going to be an additional 1 Bcf/d
of gas demand for power generation this summer compared to last
year. Another noteworthy factor is that when nukes go down this
year, the impact on the gas market likely will be greater than in
years past, he said, because the market is relying more this year
on existing nuclear power. Nuclear generation plants are operating
at much higher efficiency rates compared to years past. "The risk
is that the nuke fleet doesn't operate like champs moving forward.
One breaks down, it's a big deal; it's 1,000 MW a pop."