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Prudential Sees Bull Market Running Two More Years

Prudential Sees Bull Market Running Two More Years

With gas futures prices soaring to a new record past $5, now is not a bad time to raise price forecasts and expectations for the coming winter and next year. Prudential Securities did just that last week by upping its predictions on spot wellhead prices to $4.10 for the second half of the year, $3.55 for all of 2000 and $3.65 for 2001.

"[W]e believe the natural gas industry could continue its bullish run for another two years or more and the next 18 months look like a 'lay up,'" the investment banking firm said in its latest quarterly report on natural gas fundamentals. Below average storage inventories and increasing gas-fired electric generation demand should keep the bull market running, the report stated.

Prudential expects storage to end the injection season at about 2,660 Bcf, or 11% below last year's level. "This is assuming that the average injection rate is at or above the eight-year historical average during that period, and so far this year refills have been at or below the historical average. Depending on the winter weather, the industry typically consumes 2,000-2,500 Bcf out of storage inventories, which would likely bring storage levels down close to record lows next spring."

Prudential expects supply tightness to continue even with the addition of the 1.325 Bcf/d Alliance project, which is due to come on line next month. "[W]e question whether the Alliance pipeline will add incremental supplies to the U.S. or simply displace gas supply out of the Alberta region currently flowing down the TransCanada pipeline system." Prudential predicts Alliance will open up Oct. 2 with 600-700 MMcf/d of gas flowing. "The perception of the continued tightness in the gas supply picture is likely to result in an increase in volatility in natural gas prices."

Prudential also estimates that 1.5 Bcf/d of gas demand has been added this summer by new gas-fired power plants going on line. "Over the past few weeks, over 2,400 MW of new merchant capacity has been added to the grid, equating to about 480 MMcf/d of capacity. Earlier in the summer, 3,600 MW came on line and another 1,780 MW started up in May. In aggregate, about 7,800 MW of new summer generation load could collectively consume 1.5 Bcf/d, which is likely to be diverted from storage injections."

The firm estimates that wellhead deliverability will pick up significantly. The rig count has grown 48% since last year. Production from the deep-water Gulf of Mexico is expected to add 3.6-4 Bcf/d of new supply, "more than offsetting the deliverability decline, but shy of total expected new demand. We forecast gas demand will rise 3.1% in 2001, fueled by growth in merchant power generation."

Prudential noted that on the books is another 37,000 MW of additional new gas-fired generation capacity to be installed next year and 43,200 MW in 2002.

Rocco Canonica

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