Going against the grain and current consensus views, Raymond James analyst Marshall Adkins and his group said Monday that they believe natural gas prices will average $5/MMBtu next year, which would be about 50% higher than average 2002 prices and substantially higher than most, if not all, other gas price forecasts by analysts, consultants and the federal government.

So why are Raymond James analysts more aggressive than the average Wall Street bull? Because the winter heating season had a much earlier and colder start and there has been a run on gas supplies, setting the stage for a gas market crisis this winter, the analysts said.

Raymond James analysts said the magnitude of the crisis will be determined largely by near-term weather conditions and resulting heating demand. “While our forecast is a good $1.50/MMBtu more than the current consensus views, surprisingly, it is less than $0.50 above current NYMEX futures prices,” the team said in the its ‘Stat of the Week.’ “Clearly, the commodity traders and we have a much different viewpoint than many equity analysts.”

A good example of that difference surfaced last week when Standard & Poor’s Ratings Services (S&P) said it was increasing its 2003 Nymex natural gas price (Henry Hub) estimate from $2.75/MMBtu to $3.00/MMBtu. Earlier this month. the Energy Information Administration (EIA) also raised its price forecast for next year, but its forecast only made it to $3.69/Mcf (see Daily GPI, Dec. 23; Dec. 10).

In late September, Adkins and his associates outlined the possibility that gas prices could undergo a third step change in eight years to $5.00/Mcf in 2003. While admitting that at the time the forecast appeared brazen as storage levels neared full and 2003 First Call consensus estimates averaged $3.43/Mcf, Adkins said it now appears to be a probable outcome.

“With one-third of the normal heating season behind us and oil prices surging, we believe that the step change is probable and well underway,” the analysts said in the note. “As a result, last week we raised our official 2003 natural gas price forecast to $5.00/Mcf.”

The group has held the position that gas prices would go up significantly next year, despite full gas storage levels, as a result of rapidly falling gas supply, which Raymond James says is down roughly 6% year-over-year or 3 Bcf/d, and relatively easy weather comps versus last year’s record warm winter, which was 14% warmer than normal.

“While these factors have been pointing to a natural gas market crisis this winter, until now we’ve been cautious in forecasting the magnitude of this crisis, which will be determined by the level of winter heating demand and the price of crude oil/fuel substitutes,” the analysts said. “Both factors are now very favorable for much higher gas prices.”

The group said that its bullish case has been aided by stronger than expected weather-related demand in the United States, which has seen temperatures 5.2% colder than normal and 39.6% colder than last year through the first third of the winter withdrawal season. Taking into account this week’s warmer-than-normal forecast, which is expected to be 20% warmer than normal, the analysts said the U.S. will have been 1% colder than normal and 32.4% colder than last year. As a result of the year-over-year temperature differences, U.S. gas inventories began to decline six weeks earlier than last year and at a much faster rate.

The EIA’s report two weeks ago of a stronger than expected 162 Bcf natural gas storage withdrawal combined with last week’s 159 Bcf withdrawal has resulted in working gas levels of only 2,635 Bcf, which stand 560 Bcf below last year’s level. “Without significantly higher prices, natural gas demand will quickly outstrip available supply,” the group said.

As for fuel switchers weighing in on gas demand, the analysts said that on an MMBtu equivalent basis, heating oil has risen from $5.11/MMBtu to $6.40/MMBtu, meaning that gas prices in consuming regions have to rise well above these levels in order to encourage fuel switching.

“In our view, natural gas prices will have to continue to increase well above heating oil prices throughout the remainder of winter in order to eliminate a meaningful portion of gas demand,” the group said. “More importantly, we believe that natural gas prices will have to stay in line with heating oil parity nearly all of next year, unlike 2001, as a result of persistently declining gas supply.”

Acknowledging that predicting the weather is often more difficult than forecasting prices, the Raymond James group said they believe that the United States will experience a moderate El Nino this winter, which should result in wetter than normal conditions in the South and on the West Coast and drier than normal conditions in the Northeast, Midwest and Northwest. However, the group added that the impacts of El Nino winters are “widely misunderstood” and “less conclusive” than the press would have investors believe. Noting that the country historically has experienced a wide range of weather outcomes in moderate El Nino winters, the analysts admitted that the odds of a warmer than normal winter from this point forward are not that much different than the odds of a colder than normal winter.

Earlier this month, numerous forecasters from companies including The Williams Capital Group LLC, WSI Corp. and Salomon Smith Barney chimed in on what kind of weather this winter was likely to bring, which end-resulted with absolutely no semblance of a consensus (see Daily GPI, Dec. 9).

“Even assuming that the United States is 6.5% warmer than normal from now through the end of next March, inventory levels would decline below 200 Bcf without significantly higher gas prices to temporarily eliminate gas demand and to incentivize fuel switching by utility and industrial consumers,” the note said. “Of course, we don’t think storage will end at 200 Bcf since the market will respond to balance the supply/demand equation.” However, the group said it does appear that record low storage levels could be tested.

If the winter remains normal or colder for its remainder, Adkins’ group said the market may have to squeeze as much as 10 Bcf/d out of the system over the last 105 days of winter, which might create an all out crisis.

Going forward, the group said it believes that higher prices be sustainable, but warns that the gas supply picture is “much different” this time around. “The industry is not capable of providing the same supply response to higher prices as it did in 2001,” they said. “Demand erosion will be much harder this time.”

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