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SSB Sees 4Q Gas Averaging $5.00

SSB Sees 4Q Gas Averaging $5.00

It doesn't matter whether forecasters' predictions of an early cold winter materialize or not. Under any short-term weather/storage scenario, Salomon Smith Barney (SSB) continues to be very bullish on the outlook for natural gas prices.

The increased demand for natural gas in the summer months, along with such a small increase on the supply side, have forced SSB to raise its fourth quarter composite spot natural gas price forecast 18%, from $4.25 to $5.00 per MMBtu. The firm also upped its full-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 a measly 29 Bcf injection puts storage 14% behind last year's pace with three weeks remaining in the storage refill season. SSB estimates there will be 2,600 to 2,700 Bcf in the ground come early November, compared with 3,000 Bcf last year at the same time.

According to SSB analysts there are two different possible scenarios. If temperatures are as mild as last winter, storage levels will exit the withdrawal season next spring with the same 1,000 Bcf as this year's mark. But, if this winter turns out to be a normal winter, then storage levels would exit the heating season with only 500 Bcf in the ground. In either scenario, SSB analysts Robert Morris and Michael Schmitz believe the "heat" would still be on natural gas prices through 2001. No matter which scenario this winter follows, operators would have to "run hard" without any missteps to refill storage by next winter, the analysts said.

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

Even with more domestic rigs in the ground, an SSB study released last week, Natural Gas Price Outlook, The "Heat" Is Still On, shows that natural gas production among 40 of the largest domestic producers, is only expected to go up 0.6% from the second quarter to the third quarter, at the same time it is declining by 0.8% 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 problems with supply and demand. Western Canada, which exports about 95% of its production to the states, is on the decline, says a study of the NOVA Gas Transmission Line. NOVA's system has experienced a decrease in volume by about 0.1 Bcf/d, or 1% in the first eight months of 2000 when compared to the equivalent time period the year before.

Contributing sources such as liquefied natural gas (LNG), Deep water Gulf of Mexico, and the Powder River Basin in Wyoming are not expected to experience sizeable growth in the next year or two. LNG imports to Everett, MA, and Lake Charles, LA, nearly doubled in 1999, and are expected to increase to 0.65 Bcf/d and 0.78 Bcf/d in 2000 and 2001 respectively, said SSB's study.

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

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

All of these factors in SSB's opinion lead to the fact that natural gas prices will continue to soar throughout the 12-month period during 2001, no matter what this winter holds.

Alex Steis

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