Despite Warming Forecast, SSB Lifts Price Prediction
Discounting recent short-term predictions for warmer weather,
Salomon Smith Barney added another 75 cents to its gas price
forecast for this year. The prediction now totals $5/MMBtu at the
wellhead or about $5.15 at the Henry Hub, but SSB still fears it
may be too low given the storage and gas production situation.
Snowcover in the Midwest and Northeast and the absence of La
Nina this winter should prevent a warming trend from taking hold in
the major midwestern and northeastern market regions, SSB analysts
Robert Morris and Michael Schmitz said in an exploration and
production note last week.
Temperatures through November and December (measured by heating
degree days or HDDs) were roughly 20% colder than the 10-year
average. However, the National Weather Services' recent six- to
10-day forecasts show much warmer weather on the way for a broad
portion of the United States. "Any trend to much-warmer-than-normal
temperatures during the last three months of this winter (January
through March) is unlikely given the absence of La Nina conditions,
which limited the penetration of arctic air masses into the U.S.
last winter," the SSB analysts said. "Therefore, our outlook for
winter-ending natural gas storage levels has dramatically changed
from our 'Worst Case' scenario, thus prompting our revised
The American Gas Association (AGA) storage report last week of
the largest withdrawal so far this winter helped support SSB's
price forecast. The AGA reported a massive 209 Bcf of gas was
withdrawn from storage last week, leaving only 1.7 Tcf left for the
bulk of the winter heating season. Total working gas levels are 558
Bcf, or 24%, below the five-year average and storage in the Eastern
Consuming Region is only 56% full. SSB's models now indicate that
if the remainder of this winter matches the 10-year average, then
storage levels at the end of March will approach 675 Bcf.
"If January through March is more than 4.5% colder than the
10-year average, then withdrawals are likely to test the 500 Bcf
physical limitation on overall storage levels toward the end of
this winter," the analysts said, echoing recent comments by many
other market observers.
As a result, the "heat" is likely to remain turned up on gas
prices through next summer. SSB's current forecast shows a
quarterly breakout of $6.75/MMBtu in 1Q2001, $4.75/MMBtu in 2Q,
$4.25 in 3Q and $4.25 in the fourth quarter. The two key variables
are the pace of economic expansion and the growth in domestic gas
SSB has been relatively optimistic on gas production growth
compared other recent forecasts. It admitted last week that it may
have to lower its projections in light of recent comments made by
producers. SSB is predicting a 5.8% uptick in production in 2001.
"However, the view from several companies in the 'trenches' is that
drilling efficiency has dropped off much more sharply than we have
assumed," Morris and Schmitz said in their report. "In fact,
several companies have indicated to us that they believe production
additions for the most recent 100-250 domestic natural gas rigs is
about one-half of that for the first 500-600 rigs put to work
industry-wide." Reflecting that view is a recent report by the
Independent Petroleum Association of America projecting production
will rise by only 1.5% in 2001.
"Perhaps our deliverability projection could prove aggressive,"
Morris and Schmitz said. "If U.S. GDP growth, on average, in 2001
is just 1.25% and domestic natural gas production rises only 1.5%
this year, then storage levels at the beginning of November, or the
traditional start of the storage withdrawal season, are likely to
be no more than 2,600 Bcf, thus portending a potentially more dire
natural gas price landscape than this season." As a result, SSB
said it may have to raise its price projections for 2001 and 2002.