While some analysts and consultants agree that prices are nearing their bottom for the summer and likely will rebound due to an increase in gas demand related to warmer temperatures and the recent price decline, there is disagreement over what will be the “equilibrium” price for the rest of the storage injection season.

“With gas prices now approaching $5 and possibly lower levels (how low depends on weather), gas is beginning to be competitively priced again and demand destruction will continue to ease,” said Consultant Stephen Smith of Stephen Smith and Associates in his Weekly Gas Outlook. Smith expect this week’s gas storage report by the Energy Information Administration (EIA) will show evidence of that. He’s predicting only an 83 Bcf injection compared to a 97 Bcf injection in the previous report and much higher injections in the weeks prior to that.

The market “will soon test the lower extreme” of prices this summer, said Smith. However, “recent events suggest that prices may not spend much time below $5.”

Lower gas prices and rising residual fuel oil prices are reversing fuel switching incentives and are beginning to drive up gas demand, he said. “In a very short period gas has become a lot cheaper and residual fuel oil has become more expensive. Henry Hub cash prices averaged $5.26 last week as compared with a five-week average of $6.02 ending in mid-June. Over the last four weeks the gas-to-resid price ratio that we monitor has declined by 27%. Other effects also stimulate gas demand as prices retreat. These various effects are beginning to reverse the market share loss for gas that occurred when gas moved over $6.”

However, Smith also said the upside will be limited. The market already has “tested the upper pricing extreme,” he said. “We know this summer’s equilibrium price is not as high as $6.”

In contrast, the ever-bullish analysts at Raymond James & Associates are expecting a sharp decline in storage injections due to higher gas demand from power generators to push gas prices well “north of $6.”

“Even with extremely mild weather and record $6.50/Mcf spring gas prices, the United States is still not killing enough gas demand to reach a ‘full’ 3 Tcf of natural gas storage by the end of October,” said J. Marshal Adkins of Raymond James. “More importantly, we expect storage injections will fall sharply over the next three to four weeks as the combination of warmer than normal temperatures and reduced fuel switching drive natural gas demand sharply higher.”

Adkins said that over the last five weeks, about 3.6 Bcf/d of gas demand has been lost, but mild weather accounted for about 1.1 Bcf/d of that. “If we normalize these numbers for the weather, the injections would suggest that supply/demand has been shifted by only 2.5 Bcf/d (approximately 4 Bcf/d of demand destruction and 1.5 Bcf/d of ongoing supply declines) over last year’s numbers. If weather normalizes for the remainder of the summer, this data says that we must kill an additional 1 to 2 Bcf/d of gas demand more than we killed last month to reach 3 Tcf of storage by the end of the summer.”

That can only happen with prices higher than $6, according to Adkins.

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