The latest “Monthly Energy Outlook” by analyst Stephen Smith and staff found that the recent spike in natural gas prices “appears overdone,” but the tighter weekly supply/demand balance of the past few weeks justified some of the hike. However, gas prices should moderate going into 2004 and be lower on average than those in 2003.

For June through mid-November, “we had seen chronic positive weather-normalized weekly surpluses (WNWS)” but by December 5, those numbers had turned negative, the Natchez, MS-based analyst said.

“This means that the storage surplus would begin to shrink if weather were normal,” and “the current $6.50-$7 cash price is likely to result in another round of demand destruction in the coming weeks. This has good odds of pushing the WNWS back toward zero or even positive territory during the first quarter, thereby leading to a stabilizing or widening of the storage surplus if weather were normal.”

In the days before January bidweek, the analyst doubted there would be a “complete return to gas market normalcy (whatever that is).” Smith noted that if demand destruction begins in January and February, “a return to a more rational $4.50 might be expected for February bidweek and $4.20 for March. This would result in an average bidweek price of $4.90 for the first quarter of 2004.”

The energy analyst is forecasting gas prices of $4.30 for the second quarter, $4.50 for the third quarter and $4.70 for the fourth quarter, which would yield an average annual forecast of $4.60 for 2004 (as compared with $5.40 in 2003).

However, there may be two “sustainable” supply/demand shifts that could positively influence gas prices next year, he said.

The first influence comes from heating degree days (HDDs), which Smith said appear to be generating more gas demand than last winter. Annual growth in the residential/commercial sector’s Bcf-to-HDD ratio is typically very small to zero. Early evidence this winter suggests somewhat larger growth.”

Another positive influence on gas prices next year could be next imports, which include Canadian and liquefied natural gas minus exports to Mexico. Smith noted that in recent weeks, net gas imports appear to have declined “at a stronger pace than we expected.”

For information about Smith’s weekly analysis, visit www.stephensmithenergy.com.

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