It doesn’t matter whether forecasters’ predictions of an earlycold winter materialize or not. Under any short-termweather/storage scenario, Salomon Smith Barney (SSB) continues tobe very bullish on the outlook for natural gas prices.

The increased demand for natural gas in the summer months, alongwith such a small increase on the supply side, have forced SSB toraise its fourth quarter composite spot natural gas price forecast18%, from $4.25 to $5.00 per MMBtu. The firm also upped itsfull-year 2001 composite spot gas price forecast from $3.50 to$4.25 per MMBtu, a 21% increase.

Last week’s AGA storage report for the week ending Oct. 13 of ameasly 29 Bcf injection puts storage 14% behind last year’s pacewith three weeks remaining in the storage refill season. SSBestimates there will be 2,600 to 2,700 Bcf in the ground come earlyNovember, compared with 3,000 Bcf last year at the same time.

According to SSB analysts there are two different possiblescenarios. If temperatures are as mild as last winter, storagelevels will exit the withdrawal season next spring with the same1,000 Bcf as this year’s mark. But, if this winter turns out to bea normal winter, then storage levels would exit the heating seasonwith only 500 Bcf in the ground. In either scenario, SSB analystsRobert Morris and Michael Schmitz believe the “heat” would still beon natural gas prices through 2001. No matter which scenario thiswinter follows, operators would have to “run hard” without anymissteps to refill storage by next winter, the analysts said.

Natural gas prices will remain high due to rising demand for thecommodity in generating electricity during the summer storagerefill months. SSB expects gas-fired electric generation to consumean additional 470 Bcf during next year’s storage refill season.

Even with more domestic rigs in the ground, an SSB studyreleased last week, Natural Gas Price Outlook, The “Heat” Is StillOn, shows that natural gas production among 40 of the largestdomestic producers, is only expected to go up 0.6% from the secondquarter to the third quarter, at the same time it is declining by0.8% over last year’s third quarter.

The study also points out that Canada, The United States’primary source of natural gas imports, is having its own problemswith supply and demand. Western Canada, which exports about 95% ofits production to the states, is on the decline, says a study ofthe NOVA Gas Transmission Line. NOVA’s system has experienced adecrease in volume by about 0.1 Bcf/d, or 1% in the first eightmonths of 2000 when compared to the equivalent time period the yearbefore.

Contributing sources such as liquefied natural gas (LNG), Deepwater Gulf of Mexico, and the Powder River Basin in Wyoming are notexpected to experience sizeable growth in the next year or two. LNGimports to Everett, MA, and Lake Charles, LA, nearly doubled in1999, and are expected to increase to 0.65 Bcf/d and 0.78 Bcf/d in2000 and 2001 respectively, said SSB’s study.

The deep water Gulf is expected to see a 0.4 Bcf/d increase inproduction during the fourth quarter, with an additional 0.7-0.8Bcf/d to come online during 2001, but these figures do not takeinto account the decline in existing projects.

Currently, natural gas production from the Powder River Basin isin the area of 425 MMcf/d. This figure will grow by 25 MMcf/d until2001, when pipeline capacity limitations will slow production untilthe end of 2001.

All of these factors in SSB’s opinion lead to the fact thatnatural gas prices will continue to soar throughout the 12-monthperiod during 2001, no matter what this winter holds.

Alex Steis

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