If the assessment of a top industry analyst is correct, the structure of natural gas demand is undergoing a significant change which is likely to lead to increased weather-derived price volatility. Current price levels beg the question of how such elevated prices can be sustained given full storage supplies.

“Current prices are reflecting cold weather as well as supply issues. People will continue to buy gas as long as the weather is cold,” says Kyle Cooper, senior analyst with Salomon Smith Barney, Houston.

The 2003 strip, however, is over $4.00 and cold weather will not be present the entire year. “Certainly there are supply concerns, and many are focusing on the quarterly data from the largest companies, but are failing to recognize the DOE is not confirming the large drops in production reported by the large producers,” said Cooper. “It’s a big sampling error. Forty companies is not a representative sample. The larger companies are selling off their lower volume producing properties to smaller entities and are not correctly adjusting the quarterly statements,” Cooper said.

“The equity analysts will pick up the big sales of producing properties, but they fail to pick up the 20 small sales,” he added. “When the company reports they are off 200 MMcf of production, the analysts will pick up 100 MMCf sold and suggest that 100 MMcf of production was lost. In reality the company may have done 20 other small deals that account for 90% of the 100 MMcf lost. The data becomes too deep and the company isn’t going to report every detail.

“That has to be what is happening. For the first quarter data from major producers was supposedly down 5% year-to-year as reported by the 40 largest producers. When you look at the EIA data it’s only down 0.15%,” Cooper pointed out. “I think some of that tightness in supply that many are suggesting is not as prevalent as some are promoting.

“The current rig count will result in much less supply loss than is being suggested. The rig count won’t increase production but I think it keeps the supply losses to a minimum. The market may have discounted that a little too fully.

“The bottom line is that overall the residential and commercial sector is becoming a bigger component of the total market and that portion is weather-driven,” Cooper said. “The market will be more driven by weather changes than in the past. Our forecast for the first quarter of 2003 is for $3 to $5. Unless it stays really cold; then prices could reach $5 to $7. With a higher percentage of demand associated with weather, the swings will be greater. With warm weather Look for $3 to $3.50.”

Other analysts are looking for price seasonality to assert itself soon.

“Right now the industry is on target to have a little less than 1 Tcf in the ground at the end of the heating season,” said Mike Hiley, broker analyst with ABN AMRO, New York. “Thus it’s necessary to focus on where will inventories be at the end of next summer.

“Right now prices are close to a seasonal peak. Often the natural gas market will make a high between Halloween and Thanksgiving with a seasonal decline into the middle of the first quarter. I would say that the natural gas market is acting relatively normal on a seasonal basis, prices are at a higher level, but relative movement looks to be seasonally normal,” Hiley noted.

“I think that prices are a few weeks away from the seasonal peak, and the subsequent decline has to be measured from that point. The way prices are advancing we’ll be at $5.00 before you know it. A selling opportunity may be near, but right now the industry is in a ‘buy the dips’ mode.” Burson https://gastrader.net

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