With gas futures prices soaring to a new record past $5, now isnot a bad time to raise price forecasts and expectations for thecoming winter and next year. Prudential Securities did just thatlast 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 itsbullish run for another two years or more and the next 18 monthslook like a ‘lay up,'” the investment banking firm said in itslatest quarterly report on natural gas fundamentals. Below averagestorage inventories and increasing gas-fired electric generationdemand should keep the bull market running, the report stated.

Prudential expects storage to end the injection season at about2,660 Bcf, or 11% below last year’s level. “This is assuming thatthe average injection rate is at or above the eight-year historicalaverage during that period, and so far this year refills have beenat or below the historical average. Depending on the winterweather, the industry typically consumes 2,000-2,500 Bcf out ofstorage inventories, which would likely bring storage levels downclose to record lows next spring.”

Prudential expects supply tightness to continue even with theaddition of the 1.325 Bcf/d Alliance project, which is due to comeon line next month. “[W]e question whether the Alliance pipelinewill add incremental supplies to the U.S. or simply displace gassupply out of the Alberta region currently flowing down theTransCanada pipeline system.” Prudential predicts Alliance willopen up Oct. 2 with 600-700 MMcf/d of gas flowing. “The perceptionof the continued tightness in the gas supply picture is likely toresult in an increase in volatility in natural gas prices.”

Prudential also estimates that 1.5 Bcf/d of gas demand has beenadded this summer by new gas-fired power plants going on line.”Over the past few weeks, over 2,400 MW of new merchant capacityhas been added to the grid, equating to about 480 MMcf/d ofcapacity. Earlier in the summer, 3,600 MW came on line and another1,780 MW started up in May. In aggregate, about 7,800 MW of newsummer generation load could collectively consume 1.5 Bcf/d, whichis likely to be diverted from storage injections.”

The firm estimates that wellhead deliverability will pick upsignificantly. The rig count has grown 48% since last year.Production from the deep-water Gulf of Mexico is expected to add3.6-4 Bcf/d of new supply, “more than offsetting the deliverabilitydecline, but shy of total expected new demand. We forecast gasdemand will rise 3.1% in 2001, fueled by growth in merchant powergeneration.”

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

Rocco Canonica

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