Lehman Raises Gas Price Forecast for 2001, 2002
Due to cold weather and falling U.S. production, it is likely
that the oil and gas industry will not be able to refill natural
gas storage for the winter of 2001-2002, according to a Lehman
Brothers exploration and production update released last week. The
low storage levels will likely force gas prices higher for a
prolonged period of time, the report stated.
The firm expects working gas inventory levels to be at 200-400
Bcf at the end of the traditional heating season, compared to the
five-year average of 968 Bcf. Due to this shortfall, the company
expects that inventories will not be built up to necessary levels,
and will be "uncomfortably low" going into next winter. Lehman
Brothers forecasts that this will keep natural gas prices pegged
higher going into 2002.
Because of this forecast, the company is raising its 2001 gas
price forecast from $5/MMBtu to $6.25/MMBtu. Likewise, it has
bumped its 2002 price forecast from $4.15/MMBtu to $4.50/MMBtu. The
firm believes with production dropping almost 7% over the past
three years, that it is now back at 1990 levels, and probably
reached the bottom of the trough during the third quarter 2000.
Unlike many investors who believe production will rise quickly in
2001, Lehman Brothers predicts a much slower growth in 2001, a 1-2%
increase in 2001. The firm reiterates its "Buy" recommendations on
Anadarko, Apache, Devon Energy and Ocean Energy.
The firm offers the theory of "demand destruction" as a possible
way of balancing the sporadic gas market. Demand destruction refers
to customers cutting back consumption due to high energy prices.
For the fourth quarter, the company estimates heating demand
increased by 564 Bcf compared to the same period during 1999.
The analysts pointed out that the demand growth was not met with
supply growth, but instead came from an additional 301 Bcf
withdrawal from storage along with a 263 Bcf decrease in
non-heating consumption due to prices. With a first quarter average
price of $8-10/MMBtu, it is likely that more demand destruction
will take place.
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