With speculation on potential disruptions in global crude supplies driving spot and futures markets, Fitch Ratings on Monday raised its natural gas price deck to $5.75/Mcf this year and to $4.50 in 2005. Fitch also pushed oil higher, to $34/bbl this year and to $27 in 2005.

Analyst Sean T. Sexton said that because of concerns regarding U.S. natural gas production, prices are forecast to range between $4-6/Mcf “over the next few years until significant greenfield liquefied natural gas (LNG) capacity is built…” Given the long lead times to permit and build new plants, Fitch does not expect new LNG capacity to have a major effect until “2009 or beyond,” and after that, “we expect natural gas prices to average slightly less than $4/Mcf.”

The upstream segment’s outlook remains stable, with cash flows exceeding necessary maintenance capital, said Sexton. “The robust prices have fostered a new wave of acquisitions at prices significantly exceeding historical norms on a per-barrel cost basis.” Companies are also returning a significant portion of the excess cash to shareholders in dividends and stock repurchases, which has limited the use of cash for debt reduction.

“Companies that remain focused on long-term balance sheet improvement will find that 2004 will provide the opportunity to achieve rating upgrades,” he said.

U.S. gas inventories were “comfortably” at 2.047 Tcf at the beginning of July, which is 238 Bcf more than last year’s same period, and more than the latest five-year average of 2.0 Bcf. However, “lower sequential production and accelerating decline rates in the United States…remain the primary concerns and are reflected in intermediate and longer term natural gas futures prices.

In the short term, Fitch expects the weather and the price of oil to dictate the strength of gas prices, but “hot summer temperatures and the potential for hurricanes later in the summer and fall could quickly reduce the current comfortable level of inventory in storage.”

Also, Sexton noted that gas prices have remained within 20% of a 6:1 ratio with oil prices since the beginning of 2004. “If oil prices were to change dramatically, natural gas prices would likely move accordingly, albeit to a lesser extent.”

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