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Price Forecasts Still Going Up, But for How Long?

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 storage supplies.."

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, however.

Rocco Canonica

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