Price Forecasts Still Going Up, But for How Long?
In light of last Thursday's 47-cent downward futures correction
and new winter forecasts by the National Weather Service,
PaineWebber may have jumped the gun a bit in raising its Henry Hub
price projections late last week by about 15 cents for this year
and next to $3.90 and $3.95, respectively. But the investment firm
already was playing catch-up to Salomon Smith Barney (SSB) and the
rest of the bullish bunch on Wall Street.
With "limited deliverability" this winter, lower than average
storage levels, expected normal temperatures and growing demand,
"the industry is poised for one heck of a winter," PaineWebber
analyst Ronald J. Barone said in his industry research note, which
came out prior to Thursday's price collapse on Nymex. "Moreover,
there is a growing likelihood that this season will culminate with
April 1, 2001 storage supplies worn down to less than ideal levels,
leading the industry to be thrown back on the injection treadmill
for an even more challenging run than the one just ended."
Barone certainly is not the lone bull on the Street. The current
Street consensus now has composite spot wellhead prices (which are
roughly 15 cents lower than Henry Hub prices) averaging $3.69 this
year (the range of analyst's predictions is between $3.44 and
$3.88). PaineWebber's own prediction is $3.75. The Street consensus
on 2001 is that wellhead prices will average $3.62 with a range
between $3.05 and $4.35, while PaineWebber now is projecting an
average of $3.80 up from its prior forecast of $3.30. "This
increase primarily reflects an updated assessment of the season-end
Barone noted that with the 6 Bcf withdrawal reported last week
by the American Gas Association, the year-over-year storage deficit
grew to 274 Bcf from 259 Bcf in the prior week. "Looking ahead with
cooler temperatures arriving in key regions this week (along with a
20 Bcf withdrawal comparison), we would not expect to see a
significant change in the year-over-year deficit picture upon the
release of the next storage report," he said last Wednesday.
"However, with intermediate-term forecasts calling for sustained
cool temperatures throughout the Northeast and Midwest (and mild
weather influenced year-ago withdrawal comparisons), we could see
considerable growth in the deficit as the year winds down."
The six-year average of winter storage withdrawals is 97 Bcf per
week and there are three much warmer than normal winters embedded
in that average. If the industry maintains that rate this winter,
storage will be reduced to about 810 Bcf on April 1, 2001, which
compares to 1,031 last April, 1,337 in 1998 and a prior six-year
average of 999 Bcf, Barone noted. "When adjusting for these [warmer
than normal weather years] and other factors, we preliminarily
project April 1, 2001 [working gas levels] at 600-700 Bcf....."
Robert Morris of Salomon Smith Barney (SSB) said in his research
note last week that he also expected the storage situation to get
worse. "With temperatures looking to stay at or below the 10-year
average for the next several weeks, even a continued upswing in
deliverability would be insufficient to halt the slide in
year-over-year storage levels, which now stand 274 Bcf, or 9%,
below last year at this juncture," he said in his weekly report,
which came out prior to the new bearish weather forecasts.
"Nonetheless, even another record-warm winter would still leave
storage levels only slightly ahead of where they stood this year at
the end of the withdrawal season while a normal winter could render
an even tighter market next year," Morris said. "Thus, we remain
quite bullish on the long-term outlook for natural gas prices and
would not be surprised by even higher natural gas prices this
winter." SSB raised its spot price forecast in October to a Henry
Hub equivalent of $4 for 2000 up from $3.80 and increased the
forecast for 2001 to $4.40 from $3.65.
However, these outlooks may now contain some false assumptions.
According to the National Weather Service's latest six- to 10-day
forecasts, more normal weather (warmer) is coming at least in the
West. The latest map shows the area of below normal temperatures
only east of the Mississippi except for an area in the Pacific
Northwest and Rocky Mountain regions. The upper Midwest is set to
get some above-normal readings, and the rest of the West now
expected to see normal temperatures, NWS said.
Furthermore, the NWS also updated its long-term seasonal
forecasts late last week, showing a high likelihood of above normal
temperatures for nearly the entire southern half of the country
this winter. Probabilities were inconclusive for the northern half,