Despite the moderating tropical weather picture, Raymond James analyst J. Marshall Adkins said the natural gas bulls have room to roam if the BTU-parity price ratio between natural gas and oil is a valid indicator. The analyst is expecting a full-year 2006 price of $7.54/MMBtu and a full-year 2007 price of $10/MMBtu.
Not everyone is so bullish on prices. Late last month, Virginia-based Energy and Environmental Analysis Inc. (EEA) said barring a lot of hurricane activity in the Gulf of Mexico this year, it’s unlikely that natural gas prices will rise to the level of 2005 prices (see Daily GPI, Aug. 31). EEA is forecasting average 2006 Henry Hub prices at around $6.90/MMBtu, or $1.90 lower than the $8.80 average in 2005, with prices “in excess of $8” expected in 2007.
In Raymond James’ latest Energy Monthly report, Adkins noted that natural gas in August retraced the gains made in July and prices fell more than 26% from the end of July to the present. “Exceptionally hot weather in July was offset by more moderate weather in August, accompanied by higher-than-expected storage injections, which were negatively regarded by the market,” Adkins said in the report. “Natural gas rode on hurricane concerns throughout the month, though moderation of these worries sent prices downward in the back half of August.”
Despite the price discount due to the lack of a Gulf of Mexico-impacting hurricane, Adkins said the market has overreacted lower. “We continue to emphasize that the underlying fundamentals for natural gas also remain bullish, as we believe the market has overreacted to relatively large storage injections,” he said. “In a normalized weather scenario, we believe that the midpoint of U.S. natural gas will be linked to oil prices with roughly a 6:1 BTU parity price ratio. Assuming BTU parity of 6:1 and our 2006 oil forecast, fair value for gas in 2006 should be slightly above $10.00/Mcf.”
In the report, Adkins said his full-year 2006 crude oil price forecast is $67.56/bbl, up $1.50 from his previous estimate. His full-year 2007 forecast of $70 is $8 higher than his previous estimate.
Because of the current supply/demand balance and the warmer-than-normal weather last winter, Adkins said natural gas is likely to trade below this midpoint range, like it was during the first half of 2005. “The exceptionally warm weather [last] winter has had a sluggish effect on natural gas demand, storage, and prices,” he said. “In fact, natural gas storage (currently at 2.9 Tcf) is approximately 11% higher [year-over-year]. However, on Aug. 10, the Energy Information Administration reported a 12 Bcf withdrawal from storage, which was the lowest July and August injection since 1999.”
Adkins said his latest full-year 2006 gas forecast has been reduced from $8.10/Mcf to $7.54/Mcf, which implies roughly a 9:1 ratio with Raymond James’ oil forecast for the remainder of the year. However, he noted that longer-term, a return to normalized weather “should” drive U.S. natural gas prices back toward the 6:1 BTU parity price ratio. He added that his forecast for 2006 is conservative compared with both the First Call consensus and the futures market.
Looking at 2007, Adkins said assuming normal weather he expects a flat $10.00 price for each quarter during the year. “For 2007, our forecast for gas is 17% above consensus and 8% higher than the futures strip, reflecting our belief that a resurgence of price-sensitive gas demand (fuel switching/liquids stripping, etc.) and/or production shut-ins at current gas price levels should leave us with storage levels closer to 3.4 Tcf at the end of October versus the widespread investor forecast of 3.7 Tcf,” he said.
Adkins said the current stock market is underestimating the amount of gas demand that was destroyed after the hurricanes last year and the amount of demand that will return (or supply that will be shut in) at current prices.
He argued that the advent of liquefied natural gas brings natural gas closer to a single global gas market. LNG will intensify international competition for gas resources over time and help keep prices linked to crude oil at a 6:1 BTU parity ratio, he said.
“The bottom line remains simple: the combination of falling domestic gas supply, a healthy U.S. economy, and favorable fuel-switching ratios should eventually result in natural gas prices trading at or near BTU parity with petroleum liquids.”
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