Lehman Brothers Runs with the Bulls
With record high spot and futures prices last week, continued
cold weather and bullish supply and demand projections, Lehman
Brothers didn't pick a bad week to raise its Henry Hub price
forecasts by about 20% for both 2001 and 2002.
"It looks like we're still working at pushing a large rock up a
steep hill," noted Lehman Brothers analyst Rick Gross. "We just
haven't seen the things you would expect to see as precursors to a
reversal in the strong price environment, and that would include a
much stronger supply response, a stumble into the heating season
with warm weather and those kind of things."
The weather has been colder than normal to date and the storage
deficit compared to levels at the same time last year has widened
to 500 Bcf, Gross noted. "We think that the short-term forecast is
such that we're going to see that gap widen by the end of December.
We think it's going to be in the 600 Bcf [area]."
Despite the expected continuation of normal and below normal
temperatures across many major markets over the next six to 10
days, Gross noted that it is still too early in the heating season
to foresee potential delivery problems. Although storage levels are
low compared to last year, there still is plenty of gas in storage
available to meet near-term peaking needs. The real problem could
come at the end of the winter if storage levels are extremely low
and there is another cold snap.
"We're looking at an exit rate for storage [at the end of the
winter heating season in April 2001] at very low levels," he said.
"We have internal debate, but we think it will be around 400-500
Bcf [of working gas]. And the ability to replenish it next summer
is going to be difficult given that we've still got a reasonably
strong economy, and we've got some more power needs with some new
capacity coming on. We wouldn't be surprised if we see going into
next heating season that inventories are in the 2,400 to 2,500 Bcf
range, which is even thinner than this year."
Despite a gas rig count that is 30% higher than the same time
last year, Lehman Brothers is not expecting a huge supply reaction
to the current record prices, said Gross. "Basically what we're
looking at is a supply response from greater drilling activity but
insufficient to meet growing demand and replenish depleted
Gross raised his Henry Hub spot price forecast from $4.20 to $5
for 2001 and from $3.50 to $4.15 for 2002. "Obviously the
[12-month] strip has blown through those numbers for both years,
but we've been reluctant to chase the strip. We've had very high
gas price forecasts since last May relative to many of our
counterparts. Obviously the strip can get fairly emotional when
it's moving a buck a day. Usually we have seasonal differences in
our forecast compared to the strip. It was about $5.70 on Monday,"
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