Due to a confluence of events, including ample natural gas storage supplies and the nation entering a recession, Ronald Barone of UBS Warburg said it should “come as no surprise” that the company has decided to lower its 2001 and 2002 natural gas spot price forecast. The analyst said he has lowered the 2001 projection of 12-region composite spot price to $3.80 from $4.10, compared to the current Street consensus of $4.00. UBS Warburg’s Henry Hub equivalent is $3.95.

The analyst added that ongoing gas/power conservation efforts, continued elasticity of retail demand, relatively solid nuclear performance and increased coal fleet utilization have also contributed to the current downslide in price, and weakness in the overall market. UBS Warburg’s 2001 breakdown is as follows: $6.45 for the first quarter 2001; $4.19 in the second quarter; $2.63 in the third quarter; and a forecast of $1.92 for the fourth quarter.

“While demand has fallen precipitously, the current supply picture has improved marginally, led by a less than 0.5% year-to-date increase in Lower 48 gas production (after backing out the 1Q01 liquids quirk) as well as by incremental levels of Canadian/LNG imports,” Barone said in a recent UBS Warburg Research note. “In short, with the current imbalance between supply and demand, few signs of a near term economic recovery (and storage poised to surpass 3.1 Tcf before the official start of the heating season), the chances of a robust 4Q01 pricing environment are low. Our new 2001 forecast reflects this reality.”

Barone added that the company is also lowering its 2002 projection of the 12-region composite spot price to $2.70 from $3.40, which equates to approximately a $2.85 Henry Hub. The current 2002 Street consensus is $3.09. The analyst said the reduction stems from the company’s expectations for a continuation of weak demand trends heading into next year.

He said weak demand combined with ample storage supplies should allow for system flexibility during the core winter heating months. He added that the company’s 2002 reduction also takes into account an improved western hydro environment, as compared to 2001, and increased LNG shipments, dependant on security and pricing issues.

Despite the reduction in its 2002 forecast, the company does believe that the market will get stronger as the year progresses, as evidenced by its quarterly projections. UBS Warburg’s 2002 forecast breakdown is as follows: $2.10 in the first quarter; $2.45 during the second quarter; $3.05 for the third quarter; and $3.20 in the fourth quarter.

Barone said that beyond the prominence of elasticity of demand, the elasticity of gas supply is “alive and well,” with both sides “working to correct short-term pricing extremes.” He added, “Price signals are important, but beyond a point the market will choke and succumb to demand destruction,” Barone said, as evidenced by events in the industry late last year and early this year.

“As a result, we believe that on an economic and weather normalized run-rate basis, there will continue to be a tight underlying balance between North American natural gas supply and demand and thus an overall robust long-term pricing environment,” Barone said in the note. The analyst said this strategy shows up in his long-term forecast. For 2003-2005, Barone’s composite spot price assumptions are $3.00, $3.25 and $3.25/MMBtu, respectively.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.